Write a Term Sheet

A Term Sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. It is a preliminary document before the execution of a definitive agreement. Term Sheets are widely used in private equity and venture capital transactions to outline the terms of an investment.

Why a Term Sheet Template Is Vital:

• Establishes the framework for negotiations between investors and the company.
• Clarifies key aspects of the investment, reducing potential misunderstandings.
• Saves time and resources by agreeing on principal terms before drafting detailed legal documents.

When to Use a Term Sheet Template:

• During the initial stages of an investment negotiation.
• When outlining the terms of a merger, acquisition, or partnership.
• Before the legal due diligence process and the drafting of formal investment documents.

Key Elements of an Effective Term Sheet Template:

1. Offering Terms:

   • Details of the investment amount and the type of security offered (e.g., equity, convertible notes).

2. Valuation:

   • Pre-money or post-money valuation of the company.

3. Capitalization Table:

   • A snapshot of the company’s ownership structure before and after the investment.

4. Voting Rights and Dividends:

   • Conditions related to voting rights and dividend distributions.

5. Liquidation Preferences:

   • Specifies the payout order in the event of a sale or liquidation of the company.

6. Conversion Rights:

   • Terms under which convertible securities can be converted into equity.

7. Anti-dilution Provisions:

   • Protection mechanisms for investors against dilution in subsequent financing rounds.

8. Governance:

   • Agreements on the composition of the board of directors and management rights.

9. Conditions Precedent to Financing:

   • Conditions that must be met for the investment to proceed.

10. Confidentiality and Exclusivity:

    • Provisions to protect sensitive information and restrict negotiations with other parties.

Crafting Tips:

• Simplicity: Keep the language straightforward and avoid overly complex terms.
• Flexibility: Allow room for negotiation and adjustment of terms.
• Transparency: Clearly outline all terms to avoid any potential conflicts.
• Fairness: Ensure that terms are reasonable and equitable for both parties.

Outcome: A well-structured Term Sheet serves as the foundation for successful investment negotiations, clearly outlining the terms and conditions of the deal. It facilitates a smoother process towards finalizing the investment, ensuring transparency and understanding between all parties involved.