Seeking investment in your new business is a thrilling but stressful time. It’s even more exciting when the other party agrees to your proposed terms, whether formally or just on a simple handshake. To ensure that the promise is honoured, it’s best to get it in writing. Taking another party at their word before an Agreement has been signed is risky, but a Term Sheet can be a good way to minimise this.
A term sheet is a precursor document which you can use during the negotiation stages. While not a legally binding document, except for clauses like confidentiality and exclusivity, it’s a good way to document your terms. Further, a term sheet is usually the step before the execution of a legally binding contract.
Key points
- A Term Sheet is a document you can use before you sign a legally binding contract
- This document gives you a good idea of the essence of a deal
- It can also help you in negotiating the final terms of the Agreement
Benefits
Having a term sheet increases the transparency of the terms in agreements. This is especially if you are an early-stage startup. This is because the terms in the final agreement may be unfavourable towards you, and hidden away in convoluted language. A simplified term sheet sets out the deal generally. It also allows you to discern what the essence of the agreement will be.
It is optimal for you, as a startup seeking investment or a party seeking to sell your business, to require a term sheet from the other party or provide one to a prospective investor or buyer before you start your due diligence process. This ensures you don’t invest time and money without a good idea of the shape the final agreement would take. It also helps you ascertain if the other party’s plans and values align with yours.
What can I include in a term sheet?
You can include just about anything relating to the agreement in a term sheet. This usually includes any vital proposal points. While term sheets are usually not as detailed or complex, any proposed terms that you want to be in the final agreement should be included with enough certainty that both parties understand exactly how the final contract will be read. This essentially acts as your proposal, paving the way for further negotiations, or if the other party finds your terms reasonable, a signed promise that it will be reflected in the final agreement.
Is it worthwhile?
Certainly. Apart from the benefits discussed above, term sheets are widely used in the commercial landscape due to their flexibility and conceptual nature, allowing the parties to reflect project-specific considerations. From Uber Technologies Inc. (yes, that Uber) offering term sheets to investors in 2015 to sell $1 billion to $1.2 billion in convertible bonds, to IndiGo signing a term sheet for the purchase of 250 Airbus airplanes, term sheets are a prominent commercial fixture. If it is good enough for them, it is for you!
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