Term Sheet for Corporate Acquisition and Finance
A term sheet is a bullet-point document for startups which lays down the proposed terms and conditions for investment and is only for discussion purposes. A well-structured investment term sheet acts as a base for final Agreements such as Shareholder’s Agreements. A term sheet is considered to be an essential document by the entrepreneurs to attract investors.
Term Sheet assures that parties involved in the business transaction agree on the significant and fundamental aspects of the deal. On the other hand, it minimizes the chance of any misunderstanding and any unnecessary disputes between the parties in future.
How to use it?
Every business makes decisions, and those decisions must be agreed on and put in writing. That's what a corporate resolution does. Yes, there are specific requirements for corporate resolutions, to make sure everything is complete, clear, and accurate.
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Key Elements of Term Sheet
A term sheet mainly includes:
- Details of the company, the current shareholders and the current directors
- The valuation of the company
- Reserved rights of the investors
- Price per share
- Voting rights
- Details of what the invested funds will be used for
- Any restrictions on the activities of the founders
- A summary of the rights relating to the issue and transfer of shares
- Liquidation preference
- Anti-dilution provision
- Exit Rights of the investors
- Option pool
- Information and Inspection rights
- Arbitration clause
- Governing Laws and Jurisdiction clause
- Other essential terms and provisions
Advantages of Term Sheet
Non Binding
Mostly, term sheet agreement is non- binding in nature except for the confidentiality clause. Through the term sheet an investee can showcase their seriousness about the transaction without being legally bound or risking anything too soon. It also gives the investee more time to decide what covenants should be kept in the definitive agreements.
Inherent Moral Obligation
Even if the term sheet does not contain any binding obligations, merely signing a term sheet can cause both investor and investee to be more committed towards the transaction as the document morally bounds them.
Reduces the chances of dispute
A term sheet includes the proposed terms and conditions and hence gives both the parties a fair idea of the future transaction. By having a term sheet before definitive documents both investor and investee can identify points of disagreement and negotiate upon those areas that plummets the chances of future disagreements and disputes.
Provides Clarity
A term sheet works as a proposal as it outlines the terms and conditions to be laid down in detail in the definitive agreements. It provides a clear picture of the transaction to the parties involved and reduces the scope of misunderstandings.
Breaking down Term Sheet
In essence, a term sheet should cover the most important aspects of an agreement without going into any minor details and contingency covered by a binding contract.
It essentially sets out the groundwork for ensuring that the parties involved in a business transaction agree on most important aspects of the deal, thus precluding the possibility of misunderstanding and diminishing the likelihood of unnecessary litigation. It also ensures that there is no premature incurrence of expensive legal charges involved in drawing up a binding agreement or contract. agree on most important aspects of the deal, thus precluding the possibility of misunderstanding and diminishing the likelihood of unnecessary litigation. It also ensures that there is no premature incurrence of expensive legal charges involved in drawing up a binding agreement or contract.
All term sheets should include certain basic elements, such as information on the identity of the parties involved, valuation, and preferred payments. It also includes information on all the properties involved, the initial purchase price, including contingencies that may impact that price, a response time period, and any other information that is considered relevant.
Start Up Term Sheet
Few important conditions to keep in mind for a start-up term sheet:
- Non-binding
- Valuation of the company
- Amount of investment
- Percentage stake
- Anti-dilutive provisions
- Clarifying voting rights
- Describe the liquidation preference
- Investor commitment
A term sheet used as part of a merger or attempted takeover will typically contain information about the initial offer of the purchase price and preferred method of payment, as well as the properties included in the transaction. It may also contain information about what if anything is excluded from the contract or any things that either or both parties may regard as requirements.
