In the final part of this article series on term sheets, I’ll cover some of the remaining terms typically found in a term sheet.
Use of proceeds
When investors put their money into a company, the general expectation is they are providing capital to take the company forward and help grow the business by funding hiring of more developers, purchasing advertising, attending trade shows, etc. To get the company to its current state, founders may have invested a lot of their time in sweat equity, not drawn a salary, etc. However, just because there is an infusion of capital, it does not necessarily mean it should be used to re-pay past efforts. Remember, investors are investing in your company at a certain valuation at the point of investment. Rolled into this valuation is all of the work to date to get the company to its current point. To cover this, the term sheet will usually give some broad points on use of proceeds and may specifically state proceeds are not to be used to re-pay any debt the company may have. So if this is an important consideration for your situation, you will need to work out something with the investors and in return most likely give a reduced valuation.
Heri, the brains behind MontrealTechWatch, 