An updated version of this note, "Early-Stage Term Sheets" (UVA-F-1730), is available and may be used as a replacement.
The typical term sheet for a venture-capital investment contains a host of contract provisions designed to protect the value of an investor's capital. The purpose of this note is to focus on a few key terms (namely, antidilution, liquidation preference, dividends, redemption, and control rights) and to discuss the ways in which these terms may be made more investor-friendly or entrepreneur-friendly. The terms discussed in this note are widely regarded by practitioners as having the greatest ability to affect the economic returns for the parties involved in an early-stage investment. At the end of the discussion of each term, a chart highlights the various ways in which these terms may be structured. The examples, though not meant to be exhaustive, offer a perspective on the various ways a term might be worded in order to confer different rights on the parties.