Closing Time Podcast
All About Term Sheets: What Are “Dirty” Terms?
Nov 15, 2023
Exploring clean vs dirty terms in startup financing, highlighting liquidation preference, cumulative dividend structures, and anti-dilution provisions. Importance of understanding these terms for fair deals amidst down rounds. Delving into complexities of investment terms, including protections like liquidation preferences and anti-dilution mechanisms. Transition from convertible notes to safes for streamlined agreements and strategic advantages. Nuances of convertible notes vs safes, focusing on maturity dates and conversion events.
31:20
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Quick takeaways
- Investors are offering clean term sheets with 1x non-participating preferred security, while dirty terms include senior liquidation preference and full ratchet anti-dilution protection.
- Shift towards Simple Agreements for Future Equity (SAFEs) over convertible notes provides flexibility and simplification in early-stage investments, especially in pre-seed and seed funding rounds.
Deep dives
Understanding Clean Terms vs. Dirty Terms in Term Sheets
Investors are increasingly offering clean term sheets with structured terms. Clean terms involve a 1x non-participating preferred security where investors can choose between liquidation preference or converting to common stock. Conversely, dirty terms include senior liquidation preference, multiple liquidation preference, cumulative dividend structures, mandatory redemption rights, and full ratchet anti-dilution protection.
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