Term sheets for VC investments Venture capitalists may have invested a great deal of time and energy convincing you that you are a good investment. However, what should you do once you receive a term sheet from a venture capitalist? In connection with an investment proposal, a term sheet details the terms and conditions Investors (called the "lead") provide most of the information in institutional venture capital term sheets, which are designed to assess the company's value and sponsor the deal. A majority of the terms are non-binding, similar to an angel investment, except for confidentiality and exclusivity rights. There is no common practice in Canada or the United States for credible venture capital investors to charge upfront fees for due diligence or expenses. Terms and conditions are contained in the term sheet A VC non-binding term sheet should include the following provisions: Investing structure aspects The preferred investment structure for institutional venture capitalists is convertible preferred shares. There are a number of components on the term sheet, including an enterprise valuation, a price per share, and a liquidation preference, which can be converted into common shares with residual value. A dictionary of economic terms According to the sheet, the following economic terms are important: ● Return analysis of investments ● Calculation of investment earnings It is necessary for startups to return preferred returns to venture capitalists so that common (residual) equity shares can be distributed to their holders. A startup's valuation can be aggressively negotiated by the founders, resulting in an additional payment upon liquidation from investors. There are two options available to the investor: a multiple return (2X, 3X) or a "double dip" — a refund plus a refund plus the amount the investor would receive at liquidation if their preferred shares were converted to common shares. In a convertible preferred share, dividends are accruing. Convertible preferred shares usually do not pay dividends in cash, but rather convert those dividends into common shares as in preferred shares. There is a general range between 4% and 8% accruing return rates, although a rate of over 10% is uncommon. Structure of reporting by the board The startup's board of directors must include both founders and institutional investors in VC terms sheets. In swing votes, independent directors are typically selected, who do not have ties to either camp and ideally have industry knowledge. As part of the term sheet, investors and founders will nominate and approve independent members. Term sheets typically contain information such as annual audits, monthly or quarterly management statements, and immediate notification of material events in addition to the standard financial reports required by institutional investors.