Navigating Venture Capital Term Sheets: A Guide for Entrepreneurs

Equity Ownership and Valuation

One of the fundamental aspects of a VC term sheet is the equity ownership and valuation of the startup. In Germany, investors typically seek ownership percentages that align with the size of their investment. Valuation is a negotiation point between the startup and the VC investor, where both parties assess the startup's potential and market traction. Founders should be prepared to present a well-reasoned valuation based on industry benchmarks and growth projections.

Investment Amount and Structure

The term sheet outlines the total investment amount and the funding structure. Entrepreneurs should clearly understand the terms of investment, including any potential future dilution resulting from additional funding rounds.

Liquidation Preference

Liquidation preference is one of the most important key terms and forms the basis of the downside protection of the investors. Means that proceed from a successful exit (e.g., trade sale or IPO) are distributed among shareholders in a way which ensures the investor's initial investment. It's crucial for founders to understand whether the preference is participating or non-participating and how it affects their potential returns.

Board Composition and Control

VC term sheets commonly address the composition of the startup's advisory board (Beirat). In Germany, investors may seek representation on the advisory board to actively participate in key decisions of the management (Geschäftsführung). Founders should consider the implications of shared control and ensure alignment with the investor's vision and goals.

Protective Provisions

Protective provisions, also known as "negative covenants," grant certain rights to investors to ensure the safeguarding of their investment. These provisions could cover matters like major business decisions, additional fundraising, or changes to the startup's structure. Understanding these provisions is vital, as they can influence the startup's operational freedom.

Exit Strategy

An essential aspect of VC term sheets is the exit strategy. Typically, investors will want to understand the startup's plans for potential exits and liquidity events. Founders should be prepared to discuss timelines, potential acquirers, and the overall strategy for delivering returns to investors.

Governing Law and Jurisdiction

As with any legal document, the choice of governing law and jurisdiction is significant in VC term sheets. Founders and investors must agree on which legal system will govern the interpretation and enforcement of the agreement. This choice can impact the resolution of any potential disputes that may arise. In our view it seems reasonable to choose the law of the country in which the startup has its registered office.

Conclusion

VC term sheets are the building blocks of successful investor-startup relationships in Germany's dynamic entrepreneurial landscape. Entrepreneurs must thoroughly comprehend the terms and implications of these agreements, seeking legal counsel when necessary. By grasping the intricacies of equity ownership, investment structures, control provisions, and other key elements, founders can confidently negotiate and secure the necessary funding to drive their innovative ideas forward.