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A GUIDE FOR TERM SHEETS

The terms and conditions between an entrepreneur and an investor, as well as other important details, can all be found in a term sheet. This relationship between a startup entrepreneur and investors is a very crucial one. Regardless on which side of the table you sit, it’s important to fully layout the terms and conditions of the investment before any type of commitment is made. 

 

In order to prepare a term sheet, you should understand what it contains, the purpose of it, and the basis of the terms and conditions that will be discussed. Much of this content will surround the financial aspects of an investment towards a startup company.

What is a Term Sheet?

A term sheet is a written document the parties exchange containing the important terms and conditions of the deal. The document summarizes the main points of the deal agreements and sorts out the differences before actually executing the legal agreements and starting off with the time-consuming due diligence.

The term sheet is “Non-Binding” as it reflects only the key and broad points between parties under which the investment will be made. It also acts as a template for the in-house or external legal teams to draft definitive agreements.

The contents and clauses of the Term Sheet vary from transaction to transaction.

 

All terms and conditions involved in the investment are included in a term sheet including: 

  • How much money is expected from the VC, or venture capitalist, to the founder of the startup, 
  • A detailed overview of the financial side of the investment, and 
  • The power and controls given to the VCs. 

In addition to the investment side of the term sheet, details are also discussed such as: 

  • The closing date of the deal between the founder and investor, 
  • The starting value of the company, and 
  • Certain provisions, to name a few. 

These are also considered to be the first step of any form of transaction between the two parties involved.

 

What is Included in a Term Sheet?

Generally speaking, a good term sheet consists of anywhere between 15 to 25 pages of content detailing the terms and conditions of the investment and exchange of ownership equity. If you’re not familiar with term sheets as a whole, the contents may seem a bit overwhelming at first due to the vastness of all that’s involved.

 

Most standard term sheets, with a few exceptions, all follow the same type of outline, including:

  • The target company, 
  • The starting value of the company, and 
  • The investors involved in the exchange should always be included in any term sheet. 

In addition to these, other important details in a term sheet include, but are not limited to:

  • Common shares as well as B class and preferred shares (if applicable)
  • The core terms which include all financial aspects of the investment, including the:
    • Capitalization table, 
    • Stock options, and 
    • Percentage of ownership
  • Confidentiality agreement
  • Post-money value of the company
  • Liquidation preference
  • Dividends
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