Venture Capital Termsheets

A friend recently asked about the typical terms in a venture capital term sheet and I realized that a source I take for granted isn't readily known in entrepreneur circles. The National Venture Capital Association (NVCA) website is targeted at venture funds and partners, but there is plenty of candy for entrepreneurs there as well. In fact, one NVCA page includes model documents that have been blessed by some of the leading venture and legal firms (company and fund counsel). Those documents include:

• Term Sheet
• Stock Purchase Agreement
• Certificate of Incorporation
• Investor Rights Agreement
• Voting Agreement
• Right of First Refusal and Co-Sale Agreement
• Management Rights Letter and
• Indemnification Agreement

The docs aren't gospel and there was plenty of heated debate when "model" docs were being drafted. For example, east coast docs are typically "thicker" with rights/protections than west coast (having learned the business in a West coast system and now managing an East coast fund, I'll leave the fingerpointing to others). That said, reviewing these docs can provide a thorough view of what to expect institutional venture deals to look like. A decent companion resource for deciphering some of the legal mumbo-jumbo is Alex Wilmerding's Deal Terms book.

Some of the stuff is pretty dense so I wouldn't recommend anyone running wild with these docs without experienced counsel at your side. Likewise, I wouldn't look to these as the standard if your courting friends and family or angels. F&F/Angel deals should be much cleaner, often using a convertible debt structure to simplify negotiations and avoid significant mistakes (e.g. setting the wrong valuation/expectations) that could hamper your ability to raise institutional venture capital when you need it most. There are a host of resources/books on angel investing, some of which are collected in my Angel Investing Bible at Amazon.

I hope you find these model docs useful and take me up on reviewing them. If the VC is the only guy at the negotiating table who understands key deal terms, your deal and your company will likely suffer.

If you have (non-legal) questions after review, feel free to comment here or email me...