Standardized Angel Investor Terms Sheets, Better Term Sheets

Term sheet templates for common or preferred equity and convertible debt

 In October 2015, I started doing a 4-hour workshop on how to structure and negotiate term sheets for early stage angel financings for Canada’s National Angel Capital Organization (NACO). This has taken me to Kitchener-Waterloo, Niagara, Victoria, Calgary, Vancouver, Jamaica and in March this year Saskatoon and Regina.  In it, I cover the core principles of common share, preferred share and convertible term sheets, as well as touching on SAFEs, spiced up with some success and horror stories. 

Poorly constructed term sheets reflect badly on the investment opportunity

And while people attending the workshop probably learned a thing or two, I learned a lot about the many diverse approaches to construct a term sheet across the country, with many of them riddled with fatal flaws or pointless clauses. As director of E-Fund I also see quite a few poorly constructed term sheets that give me an instant negative flavour when evaluating an investment opportunity. Also, there is a tendency between entrepreneurs and angel investors to enter into long and unproductive negotiations. 

Standard term sheet templates that are fair, help close deals faster and save legal costs

And yet with a bit of effort we can do much better.  So in order to help resolve this situation, NACO has just launched a project managed by Boris Mann and myself to develop standard document templates that will be a broadly applicable starting point for negotiating investment terms with start-ups. The resulting templates should act as a reliable guideline for both investors and founders and shorten the timeline to close a deal while keeping legal time and cost to the bare minimum.The goals of the project is to develop standard documents that:

• Align the interests of the founder and funder;
• Position the company for future investment and growth;
• Protect the rights of the investor;
• Reduce the friction inherent in negotiating deal terms

Join the NACO Common Docs project

The set of term sheets will cover common equity, preferred equity and convertible debt deals. We are also looking to work on standardized Canadian versions of convertible equity. It is very exciting to note that we are getting input and feedback from a number of seasoned lawyers, angels, entrepreneurs and finance professionals to get what I would like to call a ‘Canadian Standard’ for term sheets.The initial project to produce these NACO Common Docs will run through the end of March 2017. The documents and supporting educational content will be posted on the NACO site soon thereafter and will be available under an open license for use and re-use by the entire Canadian early-stage startup community.

Follow #NACOCommonDocs on Twitter and stay tuned.