A term sheet is a nonbinding agreement that illustrates the basic terms and conditions of an investment. The term sheet serves as a guide and basis for more comprehensive, legally binding documents. Once the parties concerned reach an agreement on the specifics laid out in the term sheet, a contract that conforms to the term sheet details is drawn up called the share purchase agreement (SPA).
There are a few terms that would pop up often while discussing a Term Sheet.
Term sheets are most often associated with start-ups. Financiers find this document crucial for investors, often venture capitalists (VC), who may extend capital to finance start-ups. Here are some provisions that a start-up term sheet defines:
- It is typically non-binding – Neither the VC nor the entrepreneur is legally obliged to abide by whatever is outlined on the term sheet.
- Company valuations – The percentage of stakes, investment amounts, and anti-dilutive provisions must be implied clearly.
- Investor commitment – It should declare how long the investor is required to remain vested.
- Voting rights – Start-ups pursuing funding are usually behind VCs who want to maximize their return on investment. This can result in the investor acquiring a lopsided influence on the company’s control.
- Liquidation preference – This should state how the earnings of a sale will be allocated between the investors and the entrepreneur.
A term sheet used as an element of a merger or attempted acquisition would usually contain information concerning the initial purchase price offer, the preferred payment system, and the assets included in the deal. The term sheet may also include information about items omitted from the deal or that may be considered conditions by one or both sides.