Term Sheet

In previous QuotaWiki posts, we’ve looked at the components of a fundraising deal. In this post, we’ll take an operational approach, and learn about the initial document in the fundraising process.

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🙋What is a term sheet?

A term sheet is a nonbinding agreement between the company and an investor that outlines the terms and conditions of an investment. It is frequently used as a template and basis for more detailed, legally binding documents in the future. Once the parties involved reach an agreement on the details of term sheet, they will move on to next step, coming up with a binding document or contract in accordance with the term sheet details. The term sheet reduces the likelihood of misunderstandings or unnecessary dispute. In addition, it has a benefit of preventing premature occurrence of expensive legal charges on drawing up a binding agreement or contract.

Companies planning M&A also use term sheets, but typically term sheets are more often associated with startups, because they are the ones in need of investments to start the business or expand operations. Venture capitalists, the most common investor of startups, usually have many deals in front of them. Their main concern is earning investment return, so they will mainly look for startups with potentials. But among some similarly promising competitors, startups with term sheets ready, which have terms of potential agreement laid out clearly, will be definitely appealing. In this way, entrepreneurs may find it easier to attract funds by preparing term sheets and making the process easier for investors.

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🙋What is included in the term sheet?

While the term sheet doesn’t have to contain every single detail or contingency of a deal, it should include some essential information so investors can get a grasp of what they are getting into. Below are some of the items expected in a term sheet.

• Identification Information of both business owner and investor are shared to make clear who is part of the term sheet.

• The investment amount should be stated to have accurate expectation.

• Valuation shows how much the company worth and is something that investors want to know before investment. It can be measured in two ways, pre-money and post-money.

• The percentage stake is the proportion of equity shares the investor will get in return for investment. The calculation depends greatly on the valuation, so it is drawn upon the valuation and the investment amount.

• VCs may ask for voting rights to participate in the business and maximize investment return.

• Investor commitment, which means how long the investor is required to remain vested should be also stated in the term sheet.

• It is a custom to give a time frame to allow for a certain period of time where the investor can go over the term sheet and make a formal decision.

So far, we have briefly looked what term sheet is. Although term sheet is nonbinding, each component of it is complex enough for startups to handle. Some founders underestimate the resources required for fundraising and end up being caught up to securing funds. This may result in lack of time to do anything other than securing investments for the company. QuotaBook can lessen such burden and help you focus on the core business. Let’s schedule a demo to discuss your needs and show you how we solve them.

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References

https://www.investopedia.com/terms/t/termsheet.asp

https://www.contractscounsel.com/t/us/terms-sheet