Quick Summary
A term sheet is a preliminary agreement that sets forth the basic terms of an investment, acquisition, or financing. It serves as the basis for more detailed legally binding documents.
A Term Sheet is a document that outlines the key financial and other terms of a proposed deal. While typically non-binding (except for exclusivity and confidentiality clauses), it serves as a template for the final legal agreements and signals serious intent from both parties.
Key Components of a Term Sheet
| Component | Description |
|---|---|
| Valuation | Pre-money and post-money valuation |
| Investment Amount | Amount being invested |
| Security Type | Preferred stock, convertible note, SAFE |
| Liquidation Preference | Order of payout in exit scenarios |
| Board Composition | Investor board seats |
| Protective Provisions | Investor veto rights on major decisions |
| Anti-Dilution | Protection against down rounds |
| Drag-Along/Tag-Along | Rights in acquisition scenarios |
Binding vs Non-Binding Provisions
Typically Non-Binding:
- Valuation and investment amount
- Liquidation preferences
- Board composition
- Most economic and control terms
Typically Binding:
- Confidentiality obligations
- Exclusivity period (no-shop clause)
- Expense reimbursement
- Governing law
Term Sheet Timeline
- Initial Discussion: Investor expresses interest
- Term Sheet Issued: 1-2 weeks after interest
- Negotiation: 1-2 weeks of back-and-forth
- Term Sheet Signed: Agreement on key terms
- Due Diligence: 2-6 weeks of verification
- Final Documentation: 1-2 weeks for legal docs
- Closing: Money in the bank!
Red Flags in Term Sheets
- Participating Preferred: Double dipping on exit
- Full Ratchet Anti-Dilution: Extreme founder dilution protection
- Excessive Control Rights: Too many veto rights
- Long Exclusivity: No-shop period over 30-45 days
- Cumulative Dividends: Rare and unfavorable
- Pay-to-Play: Forced participation in future rounds
Term Sheet vs Final Agreement
Term sheets are typically 2-5 pages. Final agreements include:
- Share Purchase Agreement (SPA)
- Shareholders Agreement (SHA)
- Amended Charter/Articles of Association
- Stock Option Plan amendments
- Various certificates and disclosures
Key Points
- Non-binding document outlining deal terms
- Sets framework for final legal agreements
- Covers valuation, investment, control rights
- Only confidentiality and exclusivity are binding
- Usually 2-5 pages for equity rounds
- Watch for red flags like participating preferred