From Term Sheet to Closing - What You Need to Know About Your First Priced Round

About this episode

Your first institutional funding round is a milestone for every founder – but also a legal challenge that shouldn't be underestimated. Bastian Krautwald and lawyer Manuel Nikoleyczik from musfeldt. provide deep insights into the complex process from term sheet to closing.

The Right Timing and Preparation

Before diving into a priced round, you should wait for the right moment. An institutional funding round requires intensive preparation and professional legal support. The process is significantly more complex than a first seed round with business angels.

A well-structured data room is the foundation for a successful fundraising process. All relevant company documents, contracts, financial plans, and legal documents should be cleanly organized and readily accessible. The quality of your preparation signals your professionalism to investors from the start.

Fundraising Seasons and Timing

The timing of your fundraising activities can be crucial. Certain seasons are better suited for funding rounds than others. VCs have their own cycles and budgets that you should consider in your planning.

Understanding the VC Investment Process

Venture capital funds follow standardized processes. As a founder, you should understand these to prepare accordingly. The process begins with initial conversations, proceeds through due diligence to the investment committee, and finally to the term sheet.

Each step has its own requirements and hurdles. The better prepared you are and the more you understand the process, the more professionally you can present yourself and increase your chances of successful funding.

What Happens After the Term Sheet?

Receiving a term sheet is just the beginning. Then follows the actual legal work: due diligence, contract negotiations, and drafting the final documents. This is where professional legal advice becomes indispensable.

Important contract components you should negotiate include valuation, liquidation preferences, anti-dilution clauses, and participation rights. Every decision in this round can impact future funding rounds.

Board Setup and Management

With institutional investors comes a change in your company's governance structure. The board setup needs careful consideration. Who sits on the board? Which decisions require board approval? How do you organize effective board meetings?

Professional board management is crucial for good investor relations and can help you with strategic decisions.

Key Terms in Detail

Certain contract clauses are particularly critical and deserve your full attention:

• –Liquidation Preferences: Who gets what in an exit?
• –Anti-Dilution Provisions: Investor protection against dilution
• –Vesting Arrangements: How are your founder shares secured?
• –Drag-Along and Tag-Along Rights: What happens when shares are sold?

Structuring Founder Vesting Correctly

An often underestimated aspect is founder vesting. This concerns how your own shares are "earned" over time. The standard is four years with a one-year cliff. But there are different structures, and the choice can have significant implications.

Particularly important: What happens in Good Leaver vs. Bad Leaver scenarios? These provisions should be fair and balanced.

From Signing to Closing

The path from signing the contracts to actual closing can take several more weeks. During this time, conditions must be fulfilled, final due diligence completed, and possibly remaining issues clarified.

Clean preparation and professional guidance are key to a smooth process. With the right tools like Cherry Ventures' Cap Table Tool or Index Ventures' employee participation calculator, you can keep track of everything.

Important Note: This information does not constitute legal advice. For your individual case, you should definitely consult a specialized lawyer.