Term sheets are non-binding agreements that stipulate the basic terms for making an investment. They are used to develop more detailed legal documents.
Term sheets outline the details of what the parties will agree upon, and then a contract or agreement will be drawn up that conforms to the details.
Term Sheet Breakdown
It is important to keep a non binding term sheet short, avoiding any minor details or contingencies not covered by binding contracts.
As a result, the business transaction agreement lays out the framework for all parties involved in the transaction to agree upon the most important aspects of the transaction, thereby reducing the possibility of misunderstandings and reducing the likelihood of unnecessary litigation on the part of the parties involved. Additionally, it ensures that there aren’t any expensive legal fees involved in drawing up a binding contract or agreement that have to be paid upfront.
An essential element of any term sheet is information about the parties involved, the valuation, and preferred payment options. Additionally, it includes information about all the properties involved, the initial purchase price, any contingencies that may influence the price, as well as a response timeline.
Term Sheet for Startups
Term sheets for start-ups should meet the following conditions:
- Valuation of the company
- Amount of investment
- Percentage stake
- Anti-dilutive provisions
- Clarifying voting rights
- Describe the liquidation preference
- Investor commitment
The term sheet usually contains information about the initial offer of the purchase price and preferred method of payment that were made as part of a merger or attempted takeover as well as the properties included in the transaction in the transaction as a whole. A contract can also contain information regarding what if anything is excluded from it or what may be regarded as a requirement by either party.
Raise venture capital
In the event that you are considering raising venture debt, you should do so as soon as possible after your A raises. This way, you can negotiate the best deal (like interest rate and drawing period). The founders of our company have described venture debt to us as “basically free, non-dilutive money” and as such, it is a valuable option to consider if you are looking to supplement your venture capital.
Due diligence for Term Sheet
You were advised in part two of this series that you should do reference checks on any venture capitalists you shortlisted. Now that you have reached the point where you are very close to securing investment, you will need to clear these last questions:
- Whenever there is a particular aspect that you feel the VC is promoting and you believe it is very important to you, ask more about it. Ask for clear examples of companies that have benefited by the VC’s contributions in the past.
- VCs can introduce you to the founders you want to speak with if you ask them. Don’t hesitate to ask for more reference checks and to speak with the founders in their portfolio.
- The most important consideration is to trust the investor and back out if necessary. If you don’t trust the investor, it’s best to be upfront about it and do your best to back out of the deal.
- In case a portfolio company isn’t successful, ask the venture capitalists what they do to help it succeed.
You will start the deal finalization phase after you have chosen your investors, negotiated their terms, and signed their terms sheet.