Understanding Investment Term Sheets: Definition, Examples, and Key Terms

What Is a Term Sheet?

A term sheet is a non-binding agreement that outlines the basic terms and conditions of an investment. It serves as a preliminary document that sets the foundation for further negotiations and due diligence.

Uses of a Term Sheet

A term sheet is commonly used in various investment scenarios, including:

• Startup funding
• Venture capital investments
• Mergers and acquisitions
• Private equity deals

What's Included in a Term Sheet?

A typical term sheet includes the following key elements:

• Investment amount and valuation
• Equity ownership and dilution
• Board representation and voting rights
• Founder vesting and employee stock options
• Liquidation preferences and anti-dilution provisions
• Exit strategy and rights of first refusal

Terms Found in a Term Sheet

Some common terms found in a term sheet include:

• Valuation: The agreed-upon value of the company
• Liquidation Preference: The order in which investors are repaid in the event of a liquidation event
• Anti-dilution Provisions: Protections for investors against future dilution of their ownership stake
• Board Representation: The number of seats on the company's board of directors allocated to investors
• Vesting Schedule: The timeline for founders and employees to earn their ownership stake
• Option Pool: The allocation of shares set aside for future employee stock options
• Exit Strategy: The plan for investors to exit their investment, such as through an IPO or acquisition

Tips for Writing a Term Sheet

When writing a term sheet, consider the following tips:

• Be clear and concise
• Use plain language
• Anticipate potential issues and address them
• Consult with legal and financial advisors
• Consider market standards and comparables

Example of a Term Sheet

Here is an example of a term sheet:

Company Name: ABC Tech
Investment Amount: $1,000,000
Valuation: $10,000,000
Equity Ownership: 10%
...

Who Prepares a Term Sheet?

A term sheet is typically prepared by the party seeking investment, such as the startup or company looking for funding. However, it is important to involve legal and financial advisors to ensure the terms are fair and legally sound.

Is a Term Sheet Legally Binding?

A term sheet is generally considered non-binding, meaning it does not create a legally enforceable agreement. However, certain provisions within the term sheet, such as confidentiality and exclusivity clauses, may be legally binding.

What Is a Term Sheet Format?

A term sheet can have various formats, but it typically includes sections covering the investment details, ownership and dilution, governance, vesting and stock options, and exit strategy.

The Bottom Line

A term sheet is a crucial document in the investment process, outlining the basic terms and conditions of an investment. It provides a framework for further negotiations and due diligence. Understanding the key terms and elements of a term sheet is essential for both investors and companies seeking funding.