In a recent post I discussed the “economic” aspects of a term sheet. In addition to laying out the economics of a proposed transaction, the term sheet also provides a road map to various issues revolving around “control”. As angels, although we are not involved in the day to day management of our portfolio companies, we need to have a voice in strategic issues that impact our portfolio companies. Typically this “control” is exercised either through:
Voting Rights: This section of a term sheet outlines what shareholder consents will be required for the company to undertake a major action such as a sale of the company or it’s assets, authorization of indebtedness above some agreed upon level, any increase in the number of authorized shares and other issues which have significant impact on the company and its shareholders.
Board Representation: In this section of the term sheet, both the composition of the Board (minimum and maximum number of Board Reps and the constituencies they represent) as well as the responsibilities of the Board will be outlined. In many cases Board approval will be required for any option plan as well as compensation in excess of a certain dollar level. The Board will approve the annual budget for the company and then will review the actual performance of the company versus this budget on either a monthly or quarterly basis.
By laying out the guidelines for how “control” will be exercised in the term sheet, both the investors and the company will all be “rowing in the same direction” in determining how major issues will need to be resolved going forward.