What is a Term Sheet?
Term sheets are agreements that help to establish the foundation of a working relationship between two parties. While not considered to be binding in nature, the term sheet functions as a way of documenting the basics of the relationship, including the terms and conditions that will govern the activity that takes place between the two parties. A term sheet often is prepared and serves as the basis for negotiation before a more formal contract is drafted and adopted. The use of a term sheet can be found in many different types of business relationships. Many companies will make use of this device when attempting to secure venture capital. Essentially, the term sheet will be prepared early in the discussions between the investor and the company, and define such terms as the amount to be invested, repayment terms, interest and dividends that are anticipated to be earned on the investment, and other key factors. Once both parties have come to terms on how the venture capital investment wil
Usually, the negotiation of a venture investment begins with the circulation of a document known as a “term sheet”. The term sheet is a summary of the terms the investor is prepared to accept. A term sheet is a nonbinding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail, analogous to a letter of intent. The advantage of the abbreviated term sheet format is that it expedites the process. Also, since the term sheet is not an agreement, it is less likely for a court to find unexpected promissory content; a “letter of intent” can be a dangerous document unless it specifies very clearly which portions are binding and which only guide the discussion and drafting. Some portions of a term sheet can have binding effect, of course, if and to the extent an interlocutory memorialization is needed of some binding promises, that is, confidentiality of the disclosures made in the negotiation. The format of a term sheet, however, makes it l
