Term Sheet
A Term Sheet is a non-binding document that outlines the key terms and conditions of a potential agreement or deal between two or more parties. It is typically used in the early stages of negotiations to ensure that all parties are on the same page regarding the fundamental aspects of a deal before proceeding to formal contracts. Although it is not legally binding, it serves as a blueprint for the final agreement and provides a framework for negotiating specific terms. Term Sheets are commonly used in investment, mergers, acquisitions, joint ventures, and financing deals.
Key Elements of a Term Sheet
✅Parties Involved:
This section identifies the parties to the deal. For instance, in an investment term sheet, this would include the investor and the startup or business.
✅Deal Structure:
This outlines the type of deal being proposed (e.g., equity investment, loan, or joint venture) and any major structural terms related to it, such as the investment amount, the type of securities (shares, convertible notes, etc.), and any preferred rights
✅Valuation:
In the case of investments, the term sheet should define the valuation of the business or project, often referred to as the “pre-money” valuation (value before investment) or “post-money” valuation (value after investment).
✅Investment Amount and Ownership:
The total amount of investment or funding being provided and the percentage of equity or ownership being given in exchange should be clearly mentioned.
✅Rights and Preferences of Investors:
This includes provisions related to preferred stock, voting rights, dividend rights, and liquidation preferences. These terms are crucial for investors as they protect their interests in the event of an exit or liquidation.
How to Create a Term Sheet
Define the Deal Type:
The first step is to understand the type of deal you are negotiating. Are you raising capital, entering into a joint venture, or acquiring assets? This will help outline the specific terms to include in the term sheet.Outline Key Terms:
List all the fundamental terms and conditions of the deal, including valuation, investment amount, ownership percentages, and rights of each party. Be as detailed as possible without making the document legally binding.Consult Legal Experts:
Engage with a lawyer or legal expert to ensure the term sheet is drafted correctly and includes all necessary provisions. Legal advice is particularly important when negotiating complex deals.Include Conditions Precedent:
Specify any conditions that must be fulfilled before the deal can proceed. This may include conducting due diligence, receiving financing, or obtaining regulatory approvals.Address Confidentiality:
Ensure there is a confidentiality clause to protect sensitive business information shared during the negotiation process.Ensure Clarity:
The term sheet should be clear, concise, and easy to understand by all parties involved. Avoid ambiguity that could lead to future disputes.Review and Finalize:
Once the term sheet is drafted, all parties should review the document to ensure they are aligned on the key terms. After any necessary adjustments, the term sheet can be signed.
Benefits of a Term Sheet
Clarity and Transparency:
A term sheet provides clarity on the major aspects of a deal, reducing misunderstandings and setting the foundation for future negotiations and agreements.
Prevents Misunderstandings
Clear, written terms reduce the likelihood of disputes or confusion between the parties involved.
Non-Binding Nature:
Since term sheets are generally non-binding (except for specific clauses), they allow flexibility during the negotiation process, giving parties room to adjust terms without legal commitment.
Documents Required for a Term Sheet
Business Plan:
A detailed business plan, especially if the term sheet is related to investment, can help define the valuation and the use of funds.Financial Statements:
Financial records such as balance sheets, profit and loss statements, and cash flow statements to give the investor or partner an understanding of the company’s financial health.Founders’ Agreement or Articles of Incorporation:
These documents outline the legal structure of the company and are crucial when specifying ownership and governance rights.Previous Investment Agreements:
Any prior agreements regarding investments or capital raising, as these can impact future terms and equity.Regulatory Approvals (if applicable):
Depending on the nature of the deal, certain regulatory approvals may be required, such as for mergers, acquisitions, or public offerings.
Deliverables of a Term Sheet
Clear Outline of Deal Terms:
A term sheet provides all parties with a clear understanding of the major terms and conditions before finalizing a contract.Foundation for Negotiation:
It serves as the basis for further negotiations, helping to address key issues early in the process.Legal Framework for Agreement:
While not legally binding in most cases, a term sheet lays down the groundwork for drafting legally binding agreements.
Frequently asked Questions
A term sheet outlines the key terms of a deal and serves as a basis for formal agreements. It provides a clear understanding of the deal before entering into more binding contracts.
Generally, a term sheet is non-binding, except for certain provisions such as confidentiality or exclusivity agreements.
A term sheet is typically used in the early stages of negotiations for investments, mergers, acquisitions, joint ventures, or any major business transactions.
After signing, the parties proceed to negotiate detailed contracts based on the agreed-upon terms in the term sheet.
Yes, term sheets can be modified during negotiations, especially before a final agreement is signed.
Term sheets are often drafted by the party with the most bargaining power or the party proposing the deal, but they should be reviewed by legal professionals.
Yes, investors usually request a term sheet before committing to an investment, as it provides them with clarity on the deal terms.
While the term sheet itself is not typically enforceable, any provisions that are binding (such as confidentiality) can be legally enforced.
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Our team consists of certified and experienced Registered Valuers who follow industry standards and legal requirements.
Timely and Accurate Reports
We deliver detailed and accurate valuation reports within the stipulated time frame, ensuring that our clients can make informed decisions.
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Documents and information are always kept private. Information shared with the lawyer are 100% confidential.
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