Venture Financing Term Sheets 101 with Brian Dillavou

Last year, global venture financing broke records. In 2021, $329.9 billion was invested across an estimated 17,054 deals. However, despite the record breaking year and continued growth in the economy, the latest data indicates the venture capital market is retreating in the first months of 2022.

According to recent data, round sizes from the Series A to C stages in the United States are in decline. This shift signals a less competitive market for investors looking to find a deal. However, it could signal trouble for startup founders looking for venture financing. 

As a result, startup founders need to be prepared when opportunity strikes. That’s why venture financing expert Brian Dillavou recommends founders have a firm understanding of venture financing term sheets before stepping up to the deal table.

Dillavou is a partner at legal services firm Wilson Sonsini Goodrich & Rosati where he advises startups and early-stage businesses on corporate legal issues; venture capital and other financings; stock options and other compensation matters; and M&A and capital markets transactions. On May 27, 2022, Dillavou hosted a webinar for Founders Network members where he provided customary provisions in venture financing term sheets.

Here’s a sneak peak:

To learn more about customary provisions in venture financing term sheets, see if you qualify for membership and check out the webinar from May 27.

Term Sheet Basics

Venture financing term sheets are non-binding legal documents. They lay out the conditions and agreements of venture investments between startups and venture firms. The documents include the specifics of a VC investment such as the valuation, dollar amount raised, class of shares, investor rights, and investor protection clauses. Ultimately, they serve as the basis for definitive documents regarding financing. 

“The terms set forth in the term sheet will affect the company after the financing and in future transactions,” Dillavou says. 

Valuation Misconceptions

According to recent data, while overall investment is declining, early and mid-stage valuations are actually up. However, the data also indicates that late stage deal valuations are declining, which could trickle down to other markets.

However, despite this forecast, Dillavou says it’s important to remember that valuations are only one factor in the venture financing term sheet equation. 

“The term sheet with the highest valuation isn’t always the best term sheet,” Dillavou says.  “Founders should evaluate a term sheet based on all of the terms provided, not just the valuation.”

Common Mistakes

Making it to the term sheet stage is rare. Research indicates VC firms consider roughly 100 potential opportunities for each deal they close. One in four opportunities leads to meeting. One-third of those are reviewed at a partners meeting. Additionlly, roughly half of the opportunities reviewed at a partners meeting proceed to the due diligence stage. Upon reaching the due diligence stage, startups are offered a term sheet in about a third of cases.

Startup founders who make it to the venture financing term sheet phase need to avoid making mistakes that could cost them a deal or lead to a bad deal in the long run. As a result, it’s important to be prepared. Dillavou says the most common mistake he sees is, “signing a term sheet before talking to an advisor that is an expert in working with venture-backed startup companies.”

In his webinar, Dillavou covered:

• What concepts are typically included in a venture capital term sheet
• How each of the concepts in a term sheet are interrelated
• The difference between a company favorable term sheet and an investor favorable term sheet
• Market trends in venture capital terms

To learn more about customary provisions in venture financing term sheets, see if you qualify for membership and check out the webinar from May 27.