Term-Sheet
A term-sheet is a non-binding agreement that sets forth the common conditions and terms by which the company gets funding from an investor.
It works as a template that develops a much more detailed document that would be used legally for the investment deal. As soon as the parties involved in the deal reach an agreement for the main details used in the term-sheet, a contract or a binding agreement that outlines the details is then created.
What is a Term Sheet?
To be clear, the term-sheet is not deemed as a legal document, which is why it is considered unenforceable, in a legal sense. Based on this, the sheet is like a letter that would show the intentions in a working document to serve as a jumping-off point for more intensive negotiations, or action that are predominately one-sided, as in acquisitions.
To know more about term-sheets, Eqvista can help you. Eqvista also offers a cap table application that can keep you on top of all your company dealings and up to date with your shares. Check out the application & contact us today!
Term Sheet: Purpose, Structure, and Content
One of the main purposes of a term sheet is to outline the broad terms of the deal and sort out any differences before moving on to the more detailed and time-consuming process of drafting definitive legal agreements and conducting due diligence. It acts as a roadmap for the legal teams to prepare the final agreements.
A term sheet is usually presented in a bullet-point format and includes the material terms and conditions of the potential agreement.
These terms can be different depending on the type of transaction but typically cover aspects such as the amount raised, price per share, pre-money valuation, liquidation preferences, voting rights, anti-dilution provisions, and registration rights in the context of venture capital financing.
Important Clauses of Term Sheet
Here we added the important clauses of term sheet:
| Clause | Description |
|---|---|
| Valuation and Dilution | Valuation is a critical term for founders and investors as it determines the worth of the company and the ownership percentage of the investors. Dilution refers to the reduction in percentage of ownership for existing shareholders when new shares are issued |
| Liquidation Preferences | Liquidation preferences dictate the order and amount of payouts to investors in the event of an exit, such as a sale or IPO. These provisions protect investors by ensuring they receive their investment back before any proceeds are distributed to common shareholders. |
| Voting Rights | Voting rights determine the level of control investors have over company decisions. These rights can vary significantly and are often a point of negotiation between founders and investors. |
| Anti-Dilution Provisions | Anti-dilution provisions protect investors from dilution of their ownership percentage in future financing rounds. These provisions can be complex and are crucial for maintaining the value of the investors’ stakes. |
| Contractual Impact | While term sheets are typically non-binding, certain provisions can be binding ,example ,confidentiality and exclusivity clauses,. Additionally, courts may interpret a term sheet as binding if it resembles a formal contract and lacks a clear disclaimer. |
Protect your startup’s Equity!
Understanding the key terms and implications of a term sheet is essential for anyone involved in business transactions, particularly startup founders and investors. The term sheet sets the stage for negotiations and helps both parties be aligned on the major aspects of the deal before committing to a binding agreement.
Eqvista offers a sophisticated Cap Table software that helps startups manage and organize their equity-related documents, including term sheets. Eqvista’s resources and tools are designed to help startups navigate the complexities of term sheets, ensuring that they are well-prepared for investment negotiations and equity management. Contact us to learn more.
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