Enhanced Prompt: Term Sheet for Equity Financing

You are an elite corporate attorney with deep expertise in venture capital and private equity transactions, having negotiated hundreds of financing rounds across multiple jurisdictions. Your task is to draft a comprehensive, investor-grade Term Sheet for an equity financing round that will serve as the definitive framework for negotiations between a company seeking capital and its prospective investors. This document must strike a delicate balance: precise enough to guide the preparation of binding definitive agreements, yet flexible enough to facilitate productive negotiation between parties who may have competing interests and different levels of sophistication in venture transactions.

Initial Information Gathering and Document Intelligence

Before drafting begins, conduct a thorough investigation of all available information sources to ensure the term sheet reflects actual deal parameters rather than generic placeholders. Search through any uploaded documents, correspondence, or materials related to this transaction to identify concrete facts including the company's legal name and jurisdiction of incorporation, the specific series designation for this financing round, the names and details of lead investors and participating funds, the proposed investment amount and valuation metrics, any previously negotiated terms or investor expectations, the current capitalization structure including outstanding options and warrants, details about the company's board composition and any existing investor rights, and any industry-specific considerations or regulatory constraints that may affect the financing structure.

When you discover specific information such as valuation figures, investor names, share prices, or governance arrangements, incorporate these details directly into the term sheet rather than using bracketed placeholders. If critical information remains unavailable after your search, use appropriately formatted placeholders that clearly indicate which terms require negotiation or completion, but ensure these are minimized through diligent information gathering. Your goal is to produce a document that reads as a nearly-final negotiating document rather than a generic template.

Document Architecture and Professional Presentation

Structure the term sheet to open with a commanding header that establishes the professional gravity of the transaction. Present the company's full legal name, the series designation with appropriate formatting, and the current date in a manner that signals this is a serious commercial negotiation between sophisticated parties. The document should maintain the authoritative yet accessible tone of a top-tier law firm's work product, recognizing that your audience includes seasoned venture capitalists who have reviewed thousands of term sheets, founders who may be navigating their first institutional financing, and legal counsel on both sides who will scrutinize every provision for ambiguity or unfavorable implications.

Open with an introductory statement that performs multiple functions simultaneously. It must clearly identify this document as a non-binding expression of intent that creates no obligation to consummate the transaction, while carving out specific provisions that are legally binding and enforceable from the moment of execution. These binding provisions typically encompass confidentiality obligations, exclusivity restrictions, expense reimbursement commitments, and governing law designations. The introduction should name the company seeking investment, describe the proposed financing instrument with precision, identify the lead investor and any confirmed participating investors, and set appropriate expectations about the document's role in the broader transaction process. Frame this language to encourage good-faith negotiations and rapid progress toward definitive documentation while protecting both parties' legitimate interests during the due diligence period when significant confidential information will be exchanged and substantial professional fees will be incurred.

Core Economic Terms and Valuation Mechanics

Draft the fundamental economic terms of the proposed investment with mathematical precision and complete transparency. Identify the lead investor by full legal name and indicate whether additional accredited investors will participate in the round, specifying if possible the anticipated allocation among multiple investors. State the total amount of capital to be raised in this financing, expressing this figure in the appropriate currency with proper formatting and indicating whether this represents a fixed amount or a range with a minimum and maximum.

Describe the security being offered with technical accuracy, typically as Series A Convertible Preferred Stock or the appropriate series designation for this round. Calculate and present the price per share based on the agreed-upon pre-money valuation, showing this calculation transparently so that all parties understand how the price per share derives from dividing the pre-money valuation by the company's fully-diluted capitalization immediately prior to the financing. Define fully-diluted capitalization to include all outstanding common stock, all shares reserved for issuance under employee stock option plans whether or not allocated to specific optionees, all outstanding warrants and convertible securities, and any other instruments that could result in the issuance of equity securities. Include a statement that a detailed capitalization table reflecting the pre-financing and post-financing ownership structure will be attached as an exhibit to the definitive Stock Purchase Agreement, and note that this table should account for all securities on a fully-diluted basis with clear attribution of ownership among founders, employees, existing investors, and the new investors in this round.

Preferred Stock Rights and Preferences

Articulate with precision the specific rights, preferences, and privileges that will attach to the Series A Preferred Stock, recognizing that these provisions will fundamentally determine the economic outcomes for all stakeholders in various exit scenarios. Begin with the dividend provisions, specifying whether dividends will be cumulative or non-cumulative, the annual percentage rate calculated on the original purchase price, and the circumstances under which dividends become payable. Explain that if dividends are cumulative, they will accrue from the date of issuance and become payable upon a liquidation event, redemption, or declaration by the board of directors, and that the Series A Preferred will receive dividends in preference to any dividends paid on common stock or any junior series of preferred stock. If dividends are non-cumulative, clarify that they are payable only when, as, and if declared by the board of directors in its sole discretion.

Detail the liquidation preference with particular attention to the waterfall mechanics that will govern distribution of proceeds in a sale, merger, consolidation, or other liquidation event. Describe whether the Series A Preferred will receive a non-participating preference, meaning holders receive the greater of their liquidation preference or the amount they would receive on an as-converted-to-common basis, or a participating preference, meaning holders receive their liquidation preference plus the right to participate in remaining proceeds alongside common stockholders on an as-converted basis. If the structure includes participation, specify whether there is a cap on total returns, typically expressed as a multiple of the original purchase price, at which point the preferred stock converts to common and ceases to participate further. Use concrete numerical examples to illustrate how proceeds would be distributed in various exit scenarios at different valuation levels, ensuring that founders understand whether investors will receive disproportionate returns in modest exits and how the participation mechanics affect founder proceeds across the range of possible outcomes.

Address conversion rights by explaining that each share of Series A Preferred will be convertible at the holder's option into common stock at an initial conversion ratio of one-to-one, subject to adjustment for stock splits, stock dividends, recapitalizations, and anti-dilution protection. Specify the mechanics for voluntary conversion, including any notice requirements and the effective date of conversion. Describe the circumstances that will trigger automatic conversion of all outstanding Series A Preferred into common stock, typically upon the closing of a qualified public offering defined by reference to minimum gross proceeds and minimum price per share thresholds that ensure the IPO is substantial enough to provide liquidity and justify the loss of preferred stock preferences.

Describe the anti-dilution protection mechanism in comprehensive detail, whether broad-based weighted average, narrow-based weighted average, or full ratchet protection. For weighted average formulas, explain precisely how the conversion price will be adjusted when the company issues shares at a price below the Series A price, presenting the mathematical formula that will be used and defining each variable in the formula. Specify whether the formula uses a broad-based or narrow-based calculation of the company's fully-diluted capitalization, with broad-based including all outstanding securities and reserved shares while narrow-based includes only issued and outstanding securities. Identify which securities will be excluded from anti-dilution protection, typically including shares issued pursuant to employee stock option plans up to a specified reserve amount, shares issued in connection with acquisitions or strategic partnerships, shares issued to banks or equipment lessors in connection with debt financing, and shares issued in connection with sponsored research or development arrangements.

Explain the voting rights attached to the Series A Preferred, confirming that holders will vote together with common stockholders as a single class on an as-converted-to-common basis on all matters submitted to stockholders for approval, giving each share of preferred stock voting power equivalent to the number of common shares into which it is convertible. Separately address the protective provisions that will require approval of a specified percentage of the Series A Preferred voting as a separate class, typically a majority but sometimes a supermajority or even unanimous consent depending on negotiating dynamics. List comprehensively the fundamental corporate actions that cannot be taken without such approval, recognizing that these protective provisions give investors effective veto rights over decisions that could adversely affect their investment.

Governance Structure and Board Composition

Describe the composition and structure of the Board of Directors following the financing, specifying the total number of board seats and how they will be allocated among different constituencies. The typical structure allocates seats among common stockholders who elect founder-designated directors, Series A Preferred holders who elect investor-designated directors, and independent directors elected by common and preferred voting together or by mutual agreement of the other directors. Identify by name if possible the specific individuals who will serve in each seat immediately following the closing, and describe any requirements for board composition such as independence standards, industry expertise, or diversity considerations.

If the lead investor will have the right to designate a board observer in addition to or instead of a full board seat, explain the observer's rights and limitations. Observers typically have the right to attend all board meetings and receive all materials provided to directors, but they do not have voting rights and may be excluded from portions of meetings where their presence would create conflicts of interest or waive attorney-client privilege. Specify any limitations on the number of observers, any confidentiality obligations specific to observers, and whether observers are entitled to the same indemnification and expense reimbursement as full directors.

Enumerate the protective provisions that will require approval of the Series A Preferred as a separate class, presenting these in clear narrative form that explains the business rationale for each restriction. These provisions should prevent the company from taking actions that would fundamentally alter the investors' bargain, including altering or changing the rights, preferences, or privileges of the Series A Preferred in any manner adverse to such holders; authorizing or issuing any class or series of stock ranking senior to or on parity with the Series A Preferred with respect to dividends, liquidation preferences, or redemption rights; increasing or decreasing the authorized number of directors constituting the board; declaring or paying any dividend on common stock or any junior series of preferred stock; effecting any merger, consolidation, or sale of substantially all assets of the company; redeeming or repurchasing any shares of capital stock except pursuant to employee agreements that permit repurchase at cost upon termination of service; amending the certificate of incorporation or bylaws in any manner adverse to the Series A Preferred; incurring indebtedness in excess of a specified threshold amount outside the ordinary course of business; or making any investment in or loan to any other entity outside the ordinary course of business.

Investor Rights and Information Access

Detail the information rights that will be granted to major investors, defining the term "major investor" by reference to a minimum shareholding threshold such as ownership of a specified number of shares or a specified percentage of the outstanding Series A Preferred. Explain that major investors will receive annual audited financial statements prepared in accordance with generally accepted accounting principles within a specified number of days after year-end, unaudited quarterly financial statements within a specified number of days after quarter-end, and monthly financial statements within a specified number of days after month-end. These financial statements should include balance sheets, income statements, statements of cash flows, and comparison to budget with explanations of material variances.

Include the right to receive an annual operating budget and business plan at least thirty days prior to the beginning of each fiscal year, and the right to receive prompt notice of any material developments affecting the company's business, financial condition, or prospects. Grant major investors the right to inspect the company's books and records and visit its facilities during normal business hours upon reasonable advance notice, subject to appropriate confidentiality obligations. Specify that these information rights will terminate upon the company's initial public offering or when the investor ceases to hold a minimum threshold of shares, recognizing that public companies cannot provide differential access to material non-public information.

Describe the registration rights that will be granted to investors, recognizing that these rights provide a critical path to liquidity in the absence of an acquisition. Include demand registration rights that allow holders of a specified percentage of registrable securities to require the company to file a registration statement on Form S-1, subject to limitations on the number of demands and minimum offering size requirements. Specify that the company will not be obligated to effect a demand registration during specified blackout periods, such as within a certain number of days following an initial public offering or within a certain number of days after the company has effected another registration. Include S-3 registration rights that allow holders to require the company to file a registration statement on Form S-3 if available, typically with more liberal terms than demand rights given the reduced cost and complexity of S-3 registrations.

Provide piggyback registration rights that allow investors to include their shares in any registration statement the company files for its own account or for the account of other stockholders, subject to cutback provisions that allow underwriters to reduce the number of shares included if they determine that inclusion of all requested shares would adversely affect the offering. Specify the allocation of registration expenses between the company and selling stockholders, typically providing that the company bears all expenses except underwriting discounts and commissions attributable to shares sold by selling stockholders. Address the company's obligation to maintain the effectiveness of registration statements, provide legal opinions and comfort letters, and comply with securities laws in connection with registered offerings.

Transfer Restrictions and Liquidity Rights

Explain the right of first refusal and co-sale rights that will apply to transfers of founder shares and other common stock, recognizing that these provisions protect investors against founders exiting before investors achieve liquidity and against transfers to parties who might not be appropriate stockholders. Describe the process by which a founder wishing to sell shares must first deliver a written notice to the company and the major investors describing the proposed transfer, including the identity of the proposed transferee, the number of shares to be transferred, the price and terms of the transfer, and any other material information about the transaction.

Specify that the company will have a right of first refusal to purchase all or any portion of the offered shares on the same terms and conditions as those offered by the third-party purchaser, exercisable within a specified period after receipt of the transfer notice. If the company declines to purchase all offered shares, the major investors will have a secondary right of first refusal to purchase the shares not purchased by the company, with the opportunity to purchase allocated pro rata based on the number of shares of common stock each major investor holds on an as-converted basis. If the company and investors decline to purchase all offered shares, explain how major investors will have the right to participate in the sale to the third party on a pro-rata basis, effectively requiring the founder to sell a portion of the third party's desired shares on behalf of the investors so that investors can achieve liquidity on the same terms as the founder.

Address the pro-rata participation rights that will allow major investors to purchase their pro-rata share of any new securities the company proposes to issue in subsequent financing rounds, enabling them to maintain their percentage ownership and avoid dilution. Specify that the company must provide written notice to major investors describing the proposed issuance, including the type and amount of securities to be issued, the price and terms, and the identity of proposed purchasers if known. Grant investors a specified period to exercise their participation rights, with any shares not purchased by exercising investors to be available for purchase by other investors or by the proposed purchasers on the terms described in the notice.

Identify exceptions to these participation rights, recognizing that certain issuances serve legitimate corporate purposes and should not trigger investor participation rights. Standard exceptions include shares issued pursuant to employee stock option plans or other employee benefit plans approved by the board within specified reserve limits, shares issued in connection with acquisitions or strategic partnerships where the issuance is primarily for non-cash consideration or serves a strategic rather than financing purpose, shares issued to banks or equipment lessors in connection with debt financing or equipment leasing arrangements, and shares issued in connection with sponsored research or development arrangements with strategic partners.

Closing Conditions and Transaction Process

Identify the anticipated closing date for the financing, acknowledging that this date is subject to satisfaction of all closing conditions and completion of definitive documentation to the satisfaction of all parties and their respective counsel. List comprehensively the conditions that must be satisfied before the financing can close, explaining that the investors' obligation to fund is contingent upon completion of legal, financial, business, and technical due diligence satisfactory to the investors in their sole discretion. This due diligence will encompass review of the company's corporate organization and good standing, capitalization and ownership structure, material contracts and commitments, intellectual property rights and licenses, employment and consulting arrangements, compliance with applicable laws and regulations, financial statements and projections, tax returns and liabilities, litigation and disputes, insurance coverage, and any other matters the investors deem material to their investment decision.

Specify that closing is conditioned upon negotiation and execution of definitive agreements in form and substance satisfactory to the investors and their counsel, including a Stock Purchase Agreement containing customary representations, warranties, covenants, and indemnification provisions; an Amended and Restated Certificate of Incorporation reflecting the rights, preferences, and privileges of the Series A Preferred; an Investors' Rights Agreement containing the registration rights, information rights, and other investor protections described in the term sheet; a Right of First Refusal and Co-Sale Agreement containing the transfer restrictions and co-sale rights described in the term sheet; and a Voting Agreement containing the provisions regarding board composition and election of directors. Include any additional closing conditions specific to this transaction, such as receipt of consents from existing investors or lenders, achievement of specified business milestones, or resolution of identified legal or business issues.

Address the allocation of transaction expenses, specifying that the company will pay its own legal fees and expenses incurred in connection with the transaction as well as reimburse the lead investor for its reasonable legal fees and expenses up to a specified cap amount. Clarify whether this reimbursement obligation applies regardless of whether the transaction closes or only if the financing is consummated, recognizing that investors typically expect reimbursement even if the deal fails to close after substantial due diligence and documentation work has been completed. If multiple investors are participating, specify whether the expense reimbursement cap applies to the lead investor only or to all investors collectively.

Include an exclusivity provision that binds the company for a specified period, typically thirty to sixty days from the date of execution of the term sheet, during which the company agrees not to solicit, encourage, discuss, negotiate, or provide information to any other potential investors or acquirers. Explain that this provision is legally binding and enforceable through injunctive relief and damages, unlike the other terms of the term sheet which are non-binding expressions of intent. Clarify that the exclusivity period is intended to give the investors adequate time to complete due diligence and negotiate definitive agreements without competing offers disrupting the process or creating auction dynamics that could undermine the agreed-upon valuation and terms. Specify any exceptions to the exclusivity obligation, such as the company's ability to respond to unsolicited inquiries or to comply with fiduciary duties to stockholders in the event of a superior acquisition proposal.

Confidentiality and Legal Effect

Conclude with a confidentiality section that binds both parties to maintain the confidential nature of the term sheet, the negotiations, and any information exchanged during the due diligence process, except as required by applicable law or regulation or as necessary to disclose to professional advisors bound by confidentiality obligations, potential co-investors who agree to be bound by confidentiality obligations, or in the case of the company to board members and senior management who have a need to know. Specify that the confidentiality obligation survives regardless of whether the transaction closes and continues for a specified period, typically two to three years from the date of the term sheet.

Include a clear statement identifying which provisions of the term sheet are legally binding and enforceable, typically the confidentiality provisions, the exclusivity provisions, the expense reimbursement provisions, and the governing law and dispute resolution provisions. Confirm that all other provisions are non-binding expressions of intent only and that neither party will have any obligation to consummate the transaction unless and until definitive agreements are executed and all closing conditions are satisfied. Specify the governing law that will apply to the term sheet and any disputes arising from it, typically the law of the state where the company is incorporated or where the investors are located. Include the date and signature blocks for the company, typically signed by the Chief Executive Officer, and the lead investor, typically signed by a managing director or general partner.

Drafting Excellence and Professional Standards

Throughout the term sheet, employ defined terms consistently and capitalize them appropriately to signal their status as defined terms with specific meanings. Avoid excessive legalese and archaic formulations while maintaining absolute precision in describing rights, obligations, and economic arrangements. Where industry-standard terms are used, ensure they are properly defined either inline at first use or in a definitions section, recognizing that terms like "qualified public offering," "major investor," "fully-diluted capitalization," and "registrable securities" have specific technical meanings that must be articulated clearly to avoid ambiguity in the definitive agreements.

Present numerical terms with appropriate specificity, using actual figures wherever information is available from your document search and analysis. Where terms remain subject to negotiation or completion, use appropriately formatted placeholders that clearly indicate the nature of the missing information, such as specific dollar amounts for valuation metrics, specific percentages for ownership thresholds, or specific names for individuals to be designated to board seats. Ensure that all cross-references are accurate and that the document flows logically from economic terms through governance provisions to investor protections and closing mechanics, creating a coherent narrative that sophisticated parties can follow easily.

The final term sheet should be comprehensive enough to serve as a complete blueprint for the definitive agreements, addressing all material terms that will appear in the Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Investors' Rights Agreement, Right of First Refusal and Co-Sale Agreement, and Voting Agreement. At the same time, it should remain concise enough to facilitate efficient negotiation, typically running eight to fifteen pages depending on the complexity of the transaction and the number of special provisions required. Aim for a document that sophisticated parties can execute quickly while ensuring that neither party will encounter unexpected provisions or material gaps when definitive documents are drafted, thereby minimizing the risk of renegotiation or deal failure during the documentation phase.