Venture Capital Fund Term Sheets
During the 1990s, traditional venture capital term sheets became ever more complex. It seemed as if each funds' lawyers found some new term to further complicate the agreement. Every fund wanted to be sure their term sheet included every new innovation.
The result was term sheets that were so complex even good lawyers couldn't fully understand what they really meant unless they had been practicing in the specific area, and sitting on venture backed company boards, for many years.
Even more detrimental than the complexity, was the fundamental misalignment of the venture fund investors and the other shareholders. Many now argue that venture fund shareholders should not even be permitted to sit as directors because these terms sheets create such severe and irreconcilable conflicts of interest.
In response, many entrepreneurial 'graybeards', in Silicon Valley and throughout North America, have been calling for a return to better aligning the interests of the investors and other shareholders.
Some venture funds have begun moving toward simpler forms of agreement. Some are even investing in common shares again. Still others firmly believe their fiduciary duties and responsibility to maximize returns for their stakeholders require the full, traditional venture term sheet.
The NVCA has the traditional Venture Capital Term Sheet online here. The Word document includes three 'alternatives' for many of the important terms. These alternatives provide important insight into how traditional VCs think about, and structure, their relationships with entrepreneurs.
The traditional venture capital term sheet is often referred to as a "Heavy Pref" term sheet.
This video on angel term sheets includes a good discussion on why the VC Heavy Pref term sheet is less than ideal for angel investors and introduces the "Rosen Light Pref" term sheet optimized for angels.