What is a term sheet?
Definition: A term sheet is a non-binding document outlining the terms and conditions of an investment proposal.
It serves as the basis of the agreement for further negotiations and a more detailed binding document.
What is included in a term sheet?
- Identification of all parties included in the investment deal (investor, company, legal)
- Valuation of the company’s worth and the share price that the company is offering. It also includes the number of shares already issued.
- Investment amount being made by the investor.
- Percentage stake outlining to the investor the percentage of the company they will own.
- Voting rights of the investor, including how much of an impact they can have on the company and restrictions they will have.
- Anti-dilution protects the investor from the company issuing their stocks at a lower price than the issue price.
- Commitment duration stating how long the investor needs to remain vested.
- Other terms, including any other important details specific to the investment. This can include the exit strategy, company structure, or other responsibilities from both parties.
These terms must be clear and understandable to both sides to avoid disputes or prolonging the process.
How to write a term sheet
- Research the market and consult with stakeholders on the valuation and what percentage you are willing to give. Consider what you plan to achieve with the investment and how many investors you will have.
- Determine the key terms, like their rights and obligations, aside from the investment.
- Write the initial draft of the term sheet (keeping it to five pages long) with all the terms and conditions and consult with the legal team and a lawyer to ensure everything is correct.
- If everything is right, meet with the investor and discuss the terms.
A term sheet is only an outline, so it’s common to negotiate the deal and rewrite it until both parties are satisfied.
Example of a term sheet
Mindmesh discusses investment and has written a term sheet to send to their potential investor Mark.
- Company Information: Mindmesh Inc., 177 Huntington Ave Ste 1703 Boston, MA 02115
- Valuation: The pre-money valuation is $10 Million.
- Investment: The investor will invest $1 Million in Mindmesh in exchange for a 10% equity stake.
- Voting Rights: The stockholder will have limited voting rights (one vote per share).
- Dilution: Mindmesh can’t issue new stock below the issue price of $10 per share.
- Duration: The stakeholder is obligated to hold their shares for three years.
- Additional Terms: The stockholder will have the right to appoint one director to the board of directors.
- Date of Issue: 7. Feb 2023.