What is a Term Sheet?
A term sheet is a non-binding agreement that shows the basic terms and conditions of an investment exchanged between the probable parties to a future business agreement. The rounds of speculation from a financial investors is called series of Term Sheet. Every round of investment has its own terms & conditions and these terms define a business seeking outside capital funding. It serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, you draft a contract that confirms to those details.
What are the key factors of the investment term sheet?
- Investment Term Sheet allows both the parties to point any misunderstanding or issues
- It also encourages the parties to focus on the business issues in the transaction at an early stage,
- Furthermore, it figures out any conditions that it must fulfill before legalizing the documentation,
- It contours the time for negotiation & finishing the transaction,
- Finally, it sets out the binding components which have been concurred between the parties.
Important Clauses in a Term Sheet
- Kind of Shares and the Option
- The funding financial investor tends to get into a preferred class of shares. You must specify the rights because the investment is made on the company’s risk profile & valuation at that specific time.
- Valuation
- This segment considers the agreed valuation of the company preceding the new money implantation. It decides the cost per offer paid by the investors. Most of the times, investors avoid the full investment, rather that they prefer to invest in trenches.
- Anti-Dilution Clause
- Anti-dilution clause concerns how future investment will dilute the ownership percentages of the founder and the investor. Typically, venture capital firms require an anti-dilution in order to protect them from future sales of shares at a lower value.
- Profits
- This portion traces what investors need to do with the profits they get from the success of the organization – either re-contributing or simply taking them as installment.
- Option Pool Clause
- This concerns the amount of the stock that a company sets aside to for a number of purposes such as compensation of employees, an offering to service providers or an incentive to attract new employees to the company, etc.
- Liquidation
- This clause characterizes the liquidation inclinations of the investors.
- Voting Rights
- These are the rights of a shareholder to participate in decision making of the company.
- Information Rights
- It refers to information that a venture capital investor requires from the company on a regular basis such as financial statements, budgets and other documents.
- Protective Provisions
- These are some provisions for operations of the company such as veto power on dividend declarations, financial restrictions and so on.
FAQs
Every major aspect of the business that shall allow the running of its function until the contract is made has to be mentioned.
Drafting a contract consumes time and requires a lot of planning. Therefore it is necessary for the parties to have some guidelines for the smooth functioning of the business. Term sheet assists the parties in their functioning as well as act as a base plan for the drafting of the final contract.
When a startup is seeking a traditional round of funding from a venture capitalist with a lead investor, typically the lead investor generates a term sheet for the startup to review, negotiate and sign.
Hi @Aditya_s,
Company formation documents are the key pieces of documentation issued after the successful registration of a new limited company. You must retain these important documents, ideally at your registered office address, because you will need to refer to them throughout the lifetime of your company.