During the process of seeking investment in a series A round, the startup company will speak to a number of VC funds to market its company's ideas and growth plan to attract investments. If there is interest on both sides, they will begin to negotiate and agree to the terms of their capital investment.
The initial conversation will confirm that the company is actively seeking investment, and that the VC fund is willing to invest enough capital.
The ultimate goal of the negotiation process is to produce the VC term sheets or a letter of intent or memorandum of understanding, which is a non-binding agreement between the VC fund and the startup company.
It forms the basis for later legaly binding documents, such as the shareholders agreement or SHA or the share subscription agreement, or SSA, and it will facilitate the investment and subsequent ownership of the company.
The main purpose of the VC term sheet is to lay out the initial conditions of the investment and is agreed between the VC fund and the company. This will specify details such as type of stock, amount of capital, pre-money valuation, which is crucial for determining the amount of investment and the value of each share, investor rights and preferences, and other standard investor protection clauses.
All very important discussions. The company may have some corporate assistance and will likely have produced a marketing document detailing the pre-money valuation and the business case for the company, including growth projections. It may also state the amount of capital investment that it is seeking in exchange for stock and which type of stock.
This will all be open to negotiation with the VC fund. Usually the VC fund will have its own list of rights, preferences, and protection clauses, which it would like incorporating into the term sheet as well. This is very much a discussion at this stage. Both parties are keen on a successful investment process and may have to prioritize what is key to making the investment work.
