This term sheet is for use in connection with the Founders' Agreement Template. The founders can agree in principle on what the basic business terms of their relationship will be, should the project prove successful. But postpone the details of a definitive agreement until it becomes necessary. If that never happens, then this term sheet will become moot. All of these terms are subject to negotiation with other parties if the company admits new f... show moreounders, or raises outside capital. But having the terms outlined in advance will smooth the path of future discussion.
This is a non-binding, draft term sheet, for discussion purposes only. It is intended to be used as an attachment to a pre-incorporation Founders' Agreement.
Restricted common stock grants in following proportion:
%[__] to [Founder One]
%[__] to [Founder Two]
%[__] to [Founder n]
The above percentages will be diluted equally by the admission of any other founder pre-incorporation. If the founders are eligible to participate in any company equity compensation program, they will do so according to the same proportion, and under substantially the same terms as apply to the initial grants (subject to board approval and other necessary tax and legal considerations related to the specific form of equity comp).
 years with year cliff
[quarterly] vesting after cliff
__% of each founder’s initial grant will be vested on the grant date
You may wish to have some of your grant vested immediately to reflect previous contributions to the company.
100% of each founder's initial grant will vest automatically upon [change of control] [if the founder is terminated or demoted afterward].
Investors frequently negotiate for "double-trigger" change-of-control vesting, which allows stockholders to seek a strategic acquirer for whom continued employment of founders is desirable.
100% of each founder's initial grant will vest automatically if the company files for an initial public offering.
Board and Management
Max of 5 directors
Initial directors will be [_____].
Chair elected by majority of directors, and initially will be [____].
Advisory board serving in unofficial capacity may be appointed, but has no formal role.
Officer positions include President, Secretary, and Treasurer.
Feel free to be creative with officer titles and roles; there are few restrictions on titles, but Delaware does require that an officer or officers be designated (i) with secretarial responsibility to record stockholder and director meeting minutes, and (ii) to authorize certain corporate actions on behalf of the company. Other common roles include product lead, customer lead, technical lead. These need not be reflected in the organizational documents.
Preemptive Rights; Drag-Along
[Participation in sales by cofounders]
A cofounder may not sell any equity without giving other cofounders opportunity to participate pro rata; does not apply to capital raises where the company itself issues new equity.
[Right of first refusal on sale by cofounders]
A cofounder may not sell without giving other cofounders opportunity to purchase on same terms as offered by third party.
[Absolute restriction on transfer unless unanimously approved by cofounders]
A cofounder may not sell without other cofounders’ consent; this is the simplest to implement; if there’s an opportunity to sell then everyone has to agree on the terms and participation. Restriction lapses upon change-of-control or IPO. Participation and ROFR are compatible; however, if you require consent to transfer any shares at all then there is no need for participation rights or ROFR.
[If a majority in interest of stockholders approves a sale of the company, then the majority may compel the minority stockholders to participate on the same terms, without any right to seek an appraisal of their shares.]
Limits on Rights of Other Stockholders
Stockholder management, preemptive, and consent rights do not inure to the benefit of transferees who are:
- non-permitted transferees as defined in stockholder agrt
- [former spouses]
Stockholder Rights / Approvals
The following decisions require [majority] [ ? ] [unanimous] stockholder approval:
- equity issuance / capital raise in any amount
- incurring debt over a minimum amount
- sale of equity by cofounder
- sale of the company / substantially all assets
- outbound license of core IP
- voluntary bankruptcy
- change to number of directors
- conflicted transactions
You may wish to include stockholder approval rights for significant decisions as drafted above, but it is not necessary to do so. Delaware law provides some basic minority stockholder protections by default. [Unanimous] consent required to amend stockholders’ agreement[; except that an amendment may be approved by the [unanimous] consent of such class or classes of stockholders as are affected by such amendment, without obtaining the approval of stockholders who are not affected by it]. Unanimous consent is required to amend stockholder agreement by default, but it may be convenient to allow changes with less than unanimous approval (e.g., to the extent such changes do not adversely affect the rights of non-approving stockholders).
These terms are optional, and not necessarily favorable to the founders. Do not include them without careful consideration.
The founders' employment will be at-will, subject to any negotiated contractual and employment policy limitations
At-will employment is the default in NY and is standard in startups. Typical arrangement is that the stockholders’ agreement defines “cause” and “good reason” to terminate or resign, but if you negotiate employment agreements with the company later, that agreement supersedes the earlier stockholders’ agreement definitions.
Copyright, trademark, and invention assignment self-executing for IP within scope of business, with carefully-defined exclusions.
Initial salaries and benefits will be set by the Board of Directors.
Confidentiality agreement to preserve trade secret protections.
[Non-compete, non-solicitation of clients and employees]
- geographical scope of non-compete limited to [New York tri-state area] [North America] [the World];
[Non-compete expires  year post-termination] Consider requiring a limited non-compete. Though not enforceable against CA employees, and viewed skeptically by other courts, it provides an additional tool to fight truly bad behavior by current and former employees. If the investors want a non-compete, you may as well negotiate for a properly limited one.
Termination may be for “cause” or without cause. Resignation may be without “good reason” or with good reason.
Unvested stock canceled without payment upon termination or resignation for any reason.
[Company right to repurchase vested stock at “fair market value” if cofounder terminated or resigns [prior to [2nd] anniversary] of cofounding.]
A company repurchase right may be desirable, but defining fair market value is problematic; exercising this right almost always leads to a dispute as to FMV calculation.
[Company right to repurchase vested stock at cost if cofounder terminated for cause or resigns without good reason.]
[New York State and Federal Courts located in Manhattan.]
[Arbitration by a single arbitrator in NYC under AAA rules.]
AND CONSIDER REQUIRING:
[Mandatory mediation, or early neutral evaluation under AAA rules, prior to bringing suit / arbitration.]