How-to learn about angel/vc term sheets

I think every startup entrepreneur (and angel investor) should have a good understanding of financing term sheets. Yes, even bootstrappers. I haven't raised any money for my companies that required a term sheet (just friends & family money in my first company), and yet I still think it is important for a number of reasons.

First, most companies will raise money at some point, and you don't want to be learning everything when you need to raise money because it will be distracting and you'll make mistakes that in hindsight seem stupid. Second, you never know exactly when you're going to be in a financing situation. Third, a lot of the same principles carry over into M&A term sheets, and even if you don't raise money I hope you may be involved in an acquisition at some point. And perhaps most importantly, fourth, it doesn't take very long.

I've written up the following directions to help you get there efficiently. Don't do it all in one sitting because you want your mind to digest the concepts over time. I suggest doing it over the course one week, setting aside a half an hour each day to go through this stuff.

Fortunately there are now a lot of great free, public resources to learn about financing term sheets. I would start by familiarizing yourself with some actual term sheets. For seed rounds, check out these (reading them slowly from top to bottom):
Now that you've seen what a term sheet looks like, go through each term and read the associated post in Brad Feld's Term Sheet series, a series of blog post where he explains each term. Some of these terms he covers are not in those docs, because they are more for venture rounds. You can skip those for now.

Once you feel you understand what the terms in the seed docs mean, read this Startup Company Lawyer post explaining how they differ from each other. Once you understand that, then you're ready to get a bit more complicated and look at more complete venture term sheets:
Launch the Term Sheet Generator, and open the NVCA doc. Now go through each term and go to the relevant section in the generator by accessing the select box at the top. Some of the terms will be familiar from before. The generator offers a lot of additional background/insight from the context of building a term sheet. Look for the links on the right entitled 'Click here to hide/show explanatory ntoes.' Also look for the market data links, e.g. liquidation preference.  And of course refer back to Brad's term sheet series for any posts you skipped before.

By now you should be familiar with pretty much every term and its place in the term sheet, and you're ready to digest some more advanced material. First check out this Startup Company Lawyer post on how the YC seed docs differ from traditional Series A docs and this Series Seed post on the same topic. Then check out these applicable Venture Hacks posts: Term Sheet Hacks, Option Pool Shuffle, Term sheet tune-up, & Terms that hurt. Finally, here are ome other posts that I think round out term sheet knowledge: The Challenge of The Ideal First Round Term Sheet (Brad Feld), Ideal first round funding terms & Don't shop your term sheet (Chris Dixon).

If you'd really like a book, I'd suggest the brief Term Sheets & Valuations, although I want to underscore that I don't think it is necessary. I purchased this book a number of years ago before I knew about any of the above (and most of it existed!). I found it useful then to get an intro into this stuff, and I just took it out and skimmed it and think it is still useful.


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