Much has already been written about the proverbial term sheet. From Intel and Apple to Google and Facebook, tech giants have fueled their engines with venture capital beginning with a term sheet. The modern term sheet is a multi-page document describing the detailed set of terms upon which an investor will purchase stock in a startup company. After an all-too-brief dating period, entrepreneurs choose investors (and vice versa) and codify a written description of their ‘union’ in the term sheet.
At the highest level, all these elements cluster around two themes: economics and control. At Obvious, we think it’s time to add a third category to the term sheet: values. Given that the task of building a successful company is a long and arduous journey, entrepreneurs and investors should make sure that they are well aligned on the values that define the ‘why’ of a business beyond the business plan describing the ‘what’ and the ‘how’.
Founders usually have a clear idea of their company values before they make their first hire or take their first dollar of angel investment. But somehow the world is filled with stories of entrepreneurs clashing with their investors and Board of Directors over values-based decisions long after they’ve raised capital. While the typical venture capital term sheet outlines fundamental business rules that set the stage for legally binding investor documents, they remain silent on the founders’ intentions for the company’s culture and values.
Our solution: let’s add a page to the Term Sheet that codifies the core values of the company. We call this the World Positive Term Sheet (“WPTS”). The WPTS is not intended to affect the legal investment documents (except in the case of a Delaware for-profit Public Benefit Corporation — read more about that here). Instead the purpose of the WPTS is to make sure investors and founders are aligned early on key values that will determine how company leadership makes both strategic and tactical decisions in the years to come.
Founders, imagine having a signed term sheet that describes the things that you and your company stand for. Investors, imagine having more clarity about how your entrepreneurs are going to approach decisions around hiring and employee culture. If our industry can make this change and seek input and alignment on company values early in the investment process, better companies will be born. It’s time to add “Bias Liquidation Preference” and “Planet Protective Provisions” to our founding documents.
We’ve drafted some categories and questions to help jump start the conversation, but we know that this is the opposite of standard: every startup is unique and should personalize and customize their WPTS content. We believe it’s better to start with a subset of these categories that authentically match your mission and values versus trying to include them all. Remember these terms are about alignment not enforcement—they only matter if you put them into practice in your company. We encourage you to add your ideas as comments on this post for others to remix and reuse. We’ll collect suggestions and regularly review the WPTS sample provided below.
The next time an investor hands you a Term Sheet, red-line it back and add a page (or two) to make it your version of a World Positive Term Sheet!
Describe your company mission and core values. What does your startup stand for? What problem are you committed to solving? Who are your stakeholders beyond your investors? Are you planning to form as a Delaware Public Benefit Corporation, or pursue B-Corp or other certification of your traditional Delaware C-Corp? (Refer to this Corporate Structures guide for more info.)
What commitments are you making towards building a diverse team? How will your recruiting, hiring, and training process be different than the norm? How will your company culture be inclusive to all your employees? Are there specific employee benefits that you plan to establish? How will your product or service be inclusive to customers of different genders, races, religions and income classes? How will you ensure that employee compensation aligns with your core values?
How will your business tread lightly on the planet? Can your product or service be made in a more sustainable way? Do you plan little things like filtered water in the office instead of disposable bottles, and/or big things like Cradle to Cradle certification across your supply chain?
Do you plan to pledge x% of your founders’ equity to establish a company foundation for charitable giving? Do you plan to channel x% of company profits towards an organization or cause that is aligned with your mission? Do you plan to offer paid employee leave for volunteering in your community?
SAMPLE: WORLD POSITIVE TERM SHEET
FOR DISTRIBUTED ENERGY INC. [FICTITIOUS COMPANY]
Purpose: In addition to the financial and legal terms previously defined, this term sheet describes the core values of Distributed Energy. The company intends to work together with their investors to put these values into action through the ongoing business practices across the organization.
1. CORE VALUES
Mission: We formed Distributed Energy to deliver on the vision of a 100% renewable energy planet. By creating an energy storage hardware and software system delivering 100X the energy density of current lithium ion storage, we can accelerate the deployment of wind and solar energy at utility scale. We also reduce carbon emissions for any meter endpoint by smoothing demand curves and reducing energy overproduction for utilities. As the cost of our system reduces, we hope to power micro-grids in emerging markets and solve energy poverty by bringing reliable energy to billions of humans without it today. This mission informs everything from our marketing campaigns to our long-term product road map.
Stakeholders: We plan to consider all our stakeholders at Distributed Energy. These include our investors, our employees, our utility customers, and the end consumer serviced by those utilities. In support of this, we plan to invest in the B-Corp certification of our existing Delaware C-Corporation.
2. DIVERSITY, EQUITY, INCLUSION
Recruiting for Diversity: We plan to make extra efforts, at some extra initial cost, to build a diverse team. This will include steps to remove hidden bias from our recruiting process and apply the Rooney Rule to all executive and manager-level positions. Distributed Energy is fortunate to already have two women on our five-person executive team. However, the Board of Directors, as described by this term sheet, will initially be all male. Please note our express intention to recruit a woman for the Independent Director seat that is to-be-filled.
Equitable Benefits: We plan to implement a company 401K plan within the first 24 months of operations and provide a modest company match to employee contributions. We have already implemented generous employee benefits for both maternity and paternity leave.
Customer Inclusion: With our first product for utilities, we have limited control over the types of residential and commercial customers that will deploy it. It is our goal to make our solution available to the poorest customers that will benefit the most from reduced energy costs. We plan to invest in policy lobbying efforts to subsidize the deployment of our product in affordable housing development; we believe these short-term costs will drive significant longer term business growth.
Carbon Reduction: It is critical that we ‘walk the talk’ when it comes to sustainability. We have a company policy to utilize video conferencing in lieu of air travel whenever possible, which is good for both our footprint and our bottom line. We have removed all plastic bottles from our office kitchen and instead provide each employee with a reusable bottle and access to filtered water. We plan to explore the purchase of carbon offsets to make our business 100% carbon neutral.
Sustainable Supply Chain: Our product is made by an Asian contract manufacturer with a strong track record. We will invest in audit programs to regularly check on the environmental and social standards of our partners. In addition, we will pursue Cradle to Cradle certification which may require changes to elements of our supply chain and source materials. We believe these efforts will result in marketing benefits and sales increases.
4. PLEDGING AND GIVING
Pledging: The founders plan to pledge 1% of their founding stock to the Pledge 1% Foundation via a simple warrant form. The shares will be off the cap table and the company will designate mission-aligned charities as recipients of the pledge upon liquidity. We will also explore working with The Founders Pledge for personal commitments.
Community Volunteering: We will provide a Volunteer Time Off (VTO) program offering five days of paid leave each year for employees to volunteer within a thirty-mile radius of our offices. Beyond offering this, we will tie a component of our team bonus compensation to the completion of at least three of these five annual community volunteering days.