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What Is a Term Sheet?
A term sheet is a non-binding agreement and legal document that lays out the basic terms and conditions for investment. A term sheet serves as a template for a future binding agreement. Founders of start-up companies frequently use term sheets to attract investors, especially venture capitalists, or “angel investors,” who invest their own money in a startup in exchange for a percentage of ownership. Companies can also use a term sheet for mergers or attempted acquisitions.
Since this agreement contains a great deal of information, first-time start-ups may use an online term sheet template for guidance or hire a professional to help with composition. Once completed, and after both parties have negotiated all the terms, entrepreneurs and other investors will enter the “due diligence” phase. Both parties agree to a time frame for this phase in which potential investors work out details surrounding the company’s early stages, including organization and financial projects.
What Is the Purpose of a Term Sheet?
The purpose of a term sheet is to profile an understandable and detailed document that investors and company founders can use to negotiate and agree upon the important terms of their agreement without the fine detail or permanency of a binding document. A term sheet must spell out all deal terms and conditions for both parties to avoid future disputes over the terms and expenses required.