Question

True/False for the following:

1) One thing that entrepreneurs seek to get from a term sheet is sufficient capital to bring the venture to the next business milestone, while giving up as little of the company as possible.

2) The capitalization table in a term sheet summarizes the ownership positions of all parties before and after a series of investments are made.

3) A typical exclusivity clause in a term sheet will prevent the founders from seeking capital from another firm for two years once the term sheet has been signed.

4) Venture capitalists will typically conduct an investigation of the founders and of the company to assure themselves that there has not been and there is not currently any illegal activity being conducted that could damage the company.

5) Preferred stock offers investors protections relative to the owners of common shares such as liquidation preferences and anti-dilution protection.

Answer 1

Answer to 1)

True – fund raising is time consuming and there is always requirement of more money to go to the next activity. This is the reason pre money valuation is carried by company before it goes for new investment.

Answer to 2)

True – capitalization table can be defined as a table which summarizes who owns what part of the company before and after financing.

Answer to 3)

False – according to the exclusivity clause, the company want shop with any other investors once the time sheet is signed. The signing date thereof until 5 pm on the date 30 days following the date of signing the agreement.

Answer to 4)

True – this is because venture capitalists are those people who take large amount of risk in providing capital to the start ups. If there are illegal activities, the company and expand further and the VC’s capital would be locked with the company.

Answer to 5)

True – preferred stock holders get preference of everything as the name suggests compared to the owners of the company especially at the time of liquidation and other unforeseen acts.