Whether you’ve only recently decided to seek out capital for your business or you’ve already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process. In this series we’ll look to shed some light on the legal language contained in a financing term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both the Company and the Investor.
Last week we gave an overview of just what a financing term sheet is and why it is important (check it out here if you missed it). This week we begin our first real “deep dive” discussion. To start us off, we’ll consider the top line item, the one of most concern to both Company and Investor alike: What is the price of the stock being sold? (Or, by corollary, how much of the Company does the current ownership have to “give away” in exchange for the investment?).
What we will see is that the answer to that question all comes down to what the parties “value” the Company at prior to investment: the “pre-money” valuation.