Question

True/False for the following:

1) Dilution of ownership is a benefit to an early stage venture capitalist because it indicates that other investors want a share of the same venture.

2) The sole objective of a term sheet from the investor’s point of view is to maximize their upside in the event of an exit.

3) The right of first refusal and co-sale clause in a term sheet will address the rights of a Venture Capitalist to either sell or buy shares at the same terms as a proposed sale or purchase by a founder or other shareholder.

4) The exclusivity clause in a term sheet prohibits the founder from contacting other venture capitalists to get a better or similar offer for a set period of time.

5) Preemption rights give a Venture Capitalist the right to buy shares in future rounds of financing to preserve their current interest in the company.

Answer 1

1. True since it helps the venture capitalist share the risk and get an idea of demand in the market.

2. False since maximising the upside is not only the objective, to have a clear cut documentation of terms and conditions is the main objective of term sheet.

3. True, this right gives the investors equal rights as founder in buying or selling shares.

4. True, this clause prohibits founder to contact other investors for a certain period.

5. True since this right gives the venture capitalist right to participate in future financing rounds.