Security offerings have terms the details of the contract under which investors agree to purchase the security and the company agrees to sell it. The investors and the company negotiate those terms. When agreed to, they are often written down in a nonbinding document called a term sheet. They then use the term sheet to draft the actual legal documents.
Offerings may be company-led or investor-led. When company-led, the company sets the terms of its offering and then presents those terms to the investors as a take-it-or-leave-it proposition. When investor-led, one or more investors work with the company to negotiate the terms of an offering, which will then be presented to all potential investors.
The Boise Angel Alliance funds prefer to be the lead investor and work with a company to set the terms of a deal. This allows the lead fund to structure the deal so that the terms will be attractive to the funds own members and to other angels around the region.
Venture capitalists have a standard-form term sheet and related legal documents. You can find these by searching for National Venture Capital Association Model Legal Documents. Many angel groups have based their terms on these documents. However, over time many angels began to understand that documents appropriate for VCs are more extensive than is warranted for relatively smaller investments in early stage companies.
The Boise Angel Alliance has recently abandoned the NVCA documents and adopted a set of documents known as the Series Seed documents. These are much simpler documents. Theyre not only easier to understand, but they result in substantially lower legal fees to document the deal. The Alliance used these documents for the first time in making an investment in local company Social Good Network (www.socialgoodnetwork.com).
The alliance has published details on its typical terms and a standard-form Series Seed Term Sheet on the its web site, www.boiseangelfund.com. Heres a summary of key terms:
Valuation: The value of the company before the investment is made. This value is used to compute the price per share of the stock being issued.
Offering Amount: The total dollar amount of the stock that will be sold.
Investment: The amount the lead investor intends to invest at the first close.
First Close: The investors and the company will agree whether the entire offering amount will be invested at one time or over a series of closes. If there will be multiple closes, then the term sheet will specify how much money must be invested at the time of the first close.
Vesting: The investors are investing in the entrepreneurs above all else. They want to be sure these founders dont get cold feet when the going gets tough and abandon the business. So the investors will require that the founders stock be subject to buyback at a nominal price if one or more of the founders leave the company before an agreed-upon period of time, often four years.
Obviously every deal is unique, and so are the terms. But the angel communities in Idaho and elsewhere are attempting to simplify the investment agreements to benefit both the companies and the investors. We believe the adoption of the Series Seed documents is an important step in this direction.
Kevin Learned, on special assignment with the Division of Research and Economic Development at Boise State. Past president of the Boise Angel Alliance and an investor in its funds, the Boise Angel Fund and the Treasure Valley Angel Fund. email@example.com. kevinlearned.blogspot.com. 426-3875