What is a Term Sheet?
A Term Sheet is a document that outlines the key terms and conditions of a proposed transaction between two parties. The Term Sheet is non-binding, meaning that neither party is legally obligated to abide by whatever is outlined on the term sheet. However, the Term Sheet does provide a framework for further negotiation. It can be used as the basis for a more formal agreement.
Understanding Term Sheet
The term sheet is used to document the key terms of the investment and is the first step in the investment process. The term sheet is also used to facilitate the negotiation of the final investment agreement. A term sheet is a legal document to discuss a business transaction’s terms. A term sheet contains vital information, such as the parties to the transaction, the terms that are agreed upon, and the consideration to be paid. A term sheet may be attached to a letter of intent or may be a stand-alone document outlining a business transaction.
Term Sheet items:
A term sheet is typically used in the early stages of negotiation before reaching a more formal agreement. The term sheet should include the following:
- Nonbinding Terms.
- The valuation of the company.
- The amount of money to be invested.
- The equity stake that will be received in return for the investment.
- Anti-dilutive provisions.
- Voting rights.
- Liquidation preference.
- Investor commitment.
- The timeline for the investment.
The term sheet is an essential tool for both investors and entrepreneurs. It lets both parties understand the proposed deal clearly and can help avoid disagreements later on.