What goes wrong in this term sheet?

I am raising a €600k Series Seed.

I just received a term sheet.

The relevant part is shown here:


Let’s think this through in a spreadsheet:


So I raise €600k at a €1.9m post-money valuation. That means I have to issue 32.2% new shares.


Well, not really.

The investor does not pay the entire €600k at once. He invests €300k, and only if the milestones are met he invests another €300k.

The good: the investment is based on milestones.

The bad: if I achieve the milestones, I have de-risked my startup. Fewer milestones left = higher probability of success = lower money multiple = higher valuation = fewer shares to be issued.

The term sheet does not take this into account. It assumes that both €300k payments have the same probability of success.

So what?

The difference is substantial:


Because of the milestones, I would actually raise €300k at a €1.7m valuation and another €300k at a €4.0m valuation.

That means I should end up issuing 16.1% + 7.5% = 23.6% instead of 32.2% new shares.

And keep 76.4% instead of 67.8% of the shares.


That is a neat term sheet trick.



Thanks to Hans Westerhof and Chretien Herben.

Joachim Blazer is author of The #1 Guide to Startup Valuation. How to value your startup in 12 easy steps. For founders. For seed rounds and Series A. For equity and convertible debt.