What are the Key Features of a Term sheet?

A Term Sheet is an agreement that sets the guidelines on how both parties i.e. entrepreneur and investor will be acting to protect the investments. It sets out the framework for potential investment, thus creating a parameter for negotiation on the final agreement.

The key features of term sheets are-

• Term Sheet is a written Document presented in line-item format.
• It is a non-mandatory agreement.
• The Term Sheet can be modified whenever needed.
• It is prepared before the final agreement.
• Acts as a reference work while preparing the final Document.

What is the Purpose of a Term sheet?

The term sheet is to cover the important aspects of a deal without detailing every small uncertainty covered by a binding contract. The term sheet sets the structure for ensuring that the parties involved in a business transaction agree on primarily major aspects. The term sheet minimizes the probability of a misunderstanding or unnecessary dispute.

Further, the term sheet ensures that high-prices legal charges involved in preparing a binding agreement which are not incurred previously. All term sheets contain all the information related to following elements, those are as follows:-

• The assets of the company,
• The initial purchase price,
• A period for a response and,
• Other salient information.

What are the Satisfying Conditions that a Start-Up Term Sheet considers?

Start-up Term sheets is a formal Document between the potential investors and the start-up entrepreneur. Majorly, Venture Capitalists offer funds to the start-ups. Below mentioned are some conditions that a startup term sheet should consider:

• Term-sheet is a Non-Binding Document

  The term sheet is a non-mandatory Document. Both the parties i.e. Entrepreneur and the venture capitalists are not legally obligated to abide by whatever is mentioned on the term sheet.

• Valuation of the Company

  Company valuations, amount of investment, the percentage of stakes, and anti-dilutive provisions should be mentioned clearly.

• Voting Rights

  Startups looking up for funding are usually dependent upon the Venture Capitalists who want to maximize the return on their investment. This being the case, the Venture capitalist asking for and obtaining an unfair influence on the company’s direction.

• Liquidation Preference

  The term sheet shall disclose how the proceeds of a sale will be allocated between the entrepreneur and the investors.

• Investor Commitment

  The term sheet should disclose how long the investor is required to remain vested.

The term sheet may also highlight the information regarding what, if anything is excluded from the term sheet or any items that may be considered necessary by one or both parties.