Startup Lawyers for North Carolina

Every term in a term sheet, by definition is important. A term sheet is a summary of the most important parts of a "deal" - a way of getting to and negotiating the hear of the deal before filling in the gaps with boilerplate. Therefore, you should make sure that you understand all of what has been proposed and negotiated in the term sheet - even the provision that don't seem that important - because they wouldn't be in the term sheet if they weren't a key term to one side or the other.

It depends upon when you vest and whether or not you have a "market" for the shares. You must satisfy a holding requirement for your vested shares under US securities laws that requires that you hold your shares for at least one (1) year. The vesting period is added in - so, for example, if you vested in your options six months after receiving them and then exercised your options and tried to sell your shares, you would be in violation of US securities laws. After a one year holding period you may sell them. You might, however, have restrictions, such as a "Right of First Refusal" (a "ROFR") or other restrictions on selling your shares. Its worth checking all the documents and restrictions.

If you want to avoid dilution, then you need to fund the business with your own resources, and pay all your workers with money rather than equity. Otherwise, when building a business, dilution is simply a reality you have to live with. You can start out with a large amount of ownership, for example, 80% of the authorized shares, but over time dilution is inevitable. Which would you rather have, 90% of a company worth $200,000, or 55% of a company worth $1 million?

Good question. Convertible notes (as well as SAFE's, discussed below) differ from equity in several respects. The most fundamental difference is that a convertible note is debt. A second major difference is that, although the note is debt, its terms include the noteholder's right to acquire an equity position in the future; if a certain event later occurs (defined in the note, but typically the sale of preferred stock to a future investor (e.g. a venture capital firm), but also a sale of the company can have a similar effect), this will trigger the note to convert into equity and the note is "satisfied" ... that is, the debt is extinguished when the note converts and the holder thereby becomes an equity holder (typically coming to own shares of preferred stock very similar to that issued to the future investors in that triggering event). These two differences are related to a third. A convertible note is often issued without a valuation of the company. For example, when a startup business has no operating history, it is impossible for the startup founders or the investor to decide what the company is worth. Equity cannot be issued for a fair market value (FMV), since there is no basis to determine what the FMV is. A convertible note resolves that by giving the investor (the note holder) the right to convert the note into equity later on, when another investor and the company can agree on a company valuation. In other words, the convertible note allows the company to "kick the can (of valuation) down the road" to be dealt with at another time. But, since a convertible note is debt, is has a repayment provision, and normally carries interest. This means that the note is carried on the company's balance sheet as debt, and presents the company with the future obligation to repay the note if a conversion event has not happened before the note's maturity date. So, SAFE's are often used, especially now that they have become so familiar to investors. (SAFE stands for Simple Agreement for Future Equity). Essentially, as SAFE is a convertible note without the debt features. A SAFE carries no interest and does not have to be repaid. The investor in a SAFE will normally be sophisticated and able to assess the chances the company will do well enough for a conversion event (the issuance of preferred stock, or a sale of the company) to result in the investor's SAFE converting, and thus give the investor comfort that would otherwise be lacking in an instrument that has no repayment obligation. Like a convertible note, a SAFE kicks the can of valuation down the road, where a valuation can later be determined by the company and a future investor. Founders should exercise caution in issuing convertible notes or SAFE's. Among other reasons, founders commonly do not appreciate the impact that convertible notes or SAFE's can have on the founders' own ownership. Convertible notes and SAFE's often include a feature called a "valuation cap." This can result in surprising dilution, as well as the issuance of equity to the converting note or SAFE holder at what is effectively a very low price per share, costing the company far more than the founders may have expected. Also, notes and SAFE's with very similar, but different, terms can result in a complicated capitalization table, making negotiations with venture capital firms later on more difficult, an equity transaction more complex, and thus the process more time-consuming and (therefore) more expensive.

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