Our Thoughts on the Future of Crowdfunding Term Sheets

By Andy Beal, associate

One issue crowdfunding platforms are dealing with at the moment is how to structure their term sheets in a way that attract both companies and investors, without jeopardizing a company’s attractiveness to future investors.

We speculate that the average investment amount will likely be lower (between $500-$1000), since the JOBS Act puts a cap on the amount of money an individual may invest in any one company and a company’s offering may involve unaccredited investors in some scenarios. Applying this set of assumptions, logically a company raising $1 million would end up with nearly 1,000 shareholders — way too many to expect an actual term sheet negotiation.

The reality is that crowdfunding platforms must offer standardized term sheets. There are two ways for this to shake out:

(1) the company can choose one of several template term sheets created by the platform, the specific terms of which will be disclosed to shareholders that express an interest in investing, or

(2) the platform simply offers one term sheet, and the company must agree to those terms before their project becomes available to investors.

The second route would be most convenient for the platform and investors because it simplifies the investor education process. Can you imagine trying to explain to an unsophisticated investor the difference between full-ratchet and weighted average anti-dilution?

With a “one-term-sheet-fits-all” approach, terms must be investor friendly. Platforms know that there is a direct correlation between their success and investor activity. Active investors = fully funded companies. A lopsided term sheet will eventually scare away the investor market and damage future offerings using the platform.

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