The Funded’s ideal term sheet and legal fees on VC rounds

by Healy Jones

The kind folks over at The Funded have created a template early stage term sheet that they believe will help make it easier for VCs and entrepreneurs to close Series A rounds with lower legal fees. This is very much a noble cause and I support the idea. Reducing friction and costs associated with a fund raise = great idea.

I’m not a lawyer (and as always I advise you to get a good one if you are negotiating with VCs), but if you can get a VC to agree to this term sheet at a valuation and $’s raised that you like I think you ought to accept it! This is a pretty darn entrepreneur friendly term sheet and you’d be feeling pretty good if you got a VC to sign it.

However, I’m pretty sure most VCs will push back on at least a few things, such as their preferred stock voting as converted instead of as a single class, the single trigger vesting upon acquisition (meaning the entrepreneur gets all their stock 100% vested if the company is sold), no redemption rights, some VCs will want full participation and finally I don’t see an exclusivity period in this term sheet. I’m not sure any VC that signs a term sheet without an exclusivity period really knows what he or she is doing. And they are probably going to have to ask you to pay for their legal fees (oh - you thought the term sheet was the expensive legal part of a venture capital round? It actually gets expensive when you are drafting the stock purchase agreement, the investor’s rights agreement, etc.)

Of course, if you need to raise a Series B round THAT investor may try to get different terms. And, if you use this term sheet and have issues further down the line remember that I warned you to get a lawyer to help you…

A guess the real question is, will there ever be a fund raise where the entrepreneur is going to be able to risk not having good (read: expensive) legal advice? Will it ever actually be possible to reduce the importance of sound legal advice when negotiating with VCs? A few years ago the NVCA published standard legal documents for venture capital investments. So far as I know, all decent venture capital firms base their investment documents off of these standard templates. But did this actually reduce the cost of legal advice on the typical venture capital investment? Has anyone actually looked at the average cost of company counsel pre-NVCA standard docs being published and post? I have not been playing this game long enough to know if this initiative actually saved anyone legal fees. My bet (and I have absolutely no data to back this up) is that entrepreneurs are paying about the same in legal fees today on a Series A deal as they did a year before the NVCA published their docs. So, even if The Funded or some other more standardized term sheet takes off I’m willing to be it will ALWAYS be a competitive advantage to pay up and get good legal advice on a VC transaction. You just don’t want to mess anything up when you first establish your capital structure…

One more thing: expect to pay around $25k to your company counsel and $25k to the investor’s on your Series A round.