Private Equity and Growth Capital: What Founders Should Understand Before Signing a Term Sheet

Raising private equity or growth capital can accelerate the expansion of your business or even stabilize your operations when things are challenging. For anyone seeking growth capital, receiving a term sheet often feels like a milestone, especially after months of negotiations. However, signing it without fully understanding its implications can lead to long-term consequences you might not be able to escape. Before you sign on the dotted line, here are some things to understand about a term sheet.

You Are Negotiating More Than Valuation

Founders naturally focus on valuation, and for good reason. A high pre-money valuation looks like a win, but it tells only part of the story. There are many other factors that can go into a term sheet beyond the bottom line that can quickly turn a great deal into a nightmare. You need to evaluate how different exit scenarios would actually play out, not just what the headline number tells you the company is worth.

Control Rights May Shift Immediately

Private equity investors rarely provide capital without seeking some meaningful level of oversight in exchange. Term sheets often include board seats, observer rights, and even veto power over major decisions. Collaborating with your investors can be beneficial in some cases, but you have to think long and hard about how much control you want to give up.

Dilution Is More Than Just Shifting Numbers on a Page

Equity dilution means more to a founder than seeing a percentage go down on a piece of paper. As your share of the company goes down, so does your voting power and long-term influence. It is vital to read the term sheet carefully, as some equity requirements go beyond the current funding round to ensure your investors retain the same degree of control. You need to consider the long-term effects of any concessions you make during your current funding round.

Reconcile Your Long-Term Expectations With a Potential Sale

Private equity and growth investors typically look for a return on their investment in a set amount of time. Even if a term sheet does not specify a mandatory sale date, investors might include terms that give them the power to force a sale at some point. If your goal is to operate your business long-term, you will need to weigh that desire with any requirements in the sell sheet that could force you to sell.

Your Commitment Might Not Be Optional

Investors sometimes require founders to sign employment agreements, ensuring they remain a part of the organization for a set amount of time. They also frequently include non-compete clauses or vesting arrangements that are tied to your continued service. While these clauses are designed to give you incentives to stick around, you have to consider whether or not that aligns with your long-term plans.

Discuss Your Term Sheets With One Oak Legal

There are many factors to consider in a term sheet beyond the bottom line. If you are unsure of how to proceed, the team at One Oak Legal can help. Reach out as soon as possible to schedule your private consultation.