What is Term Sheet & How it is Important?
A term sheet may likewise be referred as a letter of intent, an MOU i.e. memorandum of understanding. The first round of speculation from a financial investor is known as a term sheet. Every round of investment has its own terms & conditions and these terms define a business seeking outside capital funding. The label isn't imperative, and regarding their structure and drafting they set out the key business and legitimate terms in regard to a proposed transaction.
Term sheet can be understood as a non-binding agreement or a contract that provides the basic terms of an investment agreement. The term sheet serves as a basic necessity for the future of financial negotiations between the parties.
When the parties negotiate the terms of the investment or finance agreement, then they would end up making a term sheet. After the terms are agreed, then the parties would go ahead to make the agreement binding. The agreement or contract which is drawn upon through the term sheet is included in the contract.
What are the key factors of the investment term sheet?
- Investment Term Sheet should allow both the parties to point any misunderstanding or issues
- Term sheets must be drafted in accordance to ensure that all elaborate information is covered. All the major factors related to the investment agreement must be covered in the term sheet.
- All the major aspects must be covered in the investment term sheet to avoid any form of doubts.
- Investment Term Sheet should encourage the parties to focus on the business issues in the transaction at an early stage.
- It must enable key legitimate standards to be settled, which thus can be utilized as a system for drafting the legal transnational document.
- Investment Term Sheet figure out any conditions which should be fulfilled before legalizing the documentation.
- Investment Term Sheet contour the time for negotiation & finishing the transaction.
- Set out the binding components which have been concurred between the parties.
Where are term Sheets Used?
Term Sheets are primarily used in the following transactions:
- Mergers and Acquisitions- Term sheets are initially drawn up by parties of a merger agreement to come to an understanding of the terms to consider.
- Due Diligence- Usually in a due diligence exercise the parties would draw up a term sheet to understand what is covered under this exercise or process.
- Loan Agreements- When going for funding, term sheets are considered by the parties to understanding and negotiate the terms of a loan agreement.
- Acquisition Agreements- Like a term sheet, in an acquisition agreement the Initial questionnaire or the due diligence questionnaire is send over to the other side to find out all about the target company.
- Seed Funding Agreements-Like loan agreements, seed funding agreements would also have to draw- up a term sheet. There will be the angel investor and the start-up entrepreneur. As the project has to be credible, the angel investor would want to drawn up a term sheet.
What must an Investment Term Sheet include for investing in a start-up?
Before signing an Investment Term Sheet, you ought to choose whether the document is authoritative. As an organizer, you should be careful about restricting commitments that prejudice your capacity to work with different financial specialists for a long time period and be more careful about an investor who imposes a penalty on you if for any reasons the terms of the letter are ruptured.
If you are willing to get a formal legal advice on drafting a Investment Term Sheet you should receive the same. At Enterslice our professionals will help you drafting the requirements of an investment term sheet.
What information to include in an Investment Term Sheet?
The following information must be included in an investment term sheet:
- Investment Term Sheet must include the proper details of the company, current directors as well as shareholders
- Any rights concerning the investors or for particular founders must be included in Investment Term Sheet
- Details regarding the invested funds must be mentioned in the Investment Term Sheet
- If the investors have certain rights or reserved rights to take a major decision in the company should be included in Investment Term Sheet,
- If restrictions are on the activities of the founders then it should also be mentioned in Investment Term Sheet
- Summary of the rights related to the transfer of share, or issues, or in case company is sold must be wound up.
Points to remember while drafting an Investment Term Sheet
An Investment Term Sheet is non-binding agreement which implies that they are only a method for moving along the procedure of negotiation with certain terms & conditions that open up the agreement for discussion.
An Investment Term Sheet is basically a declaration of intent and not to be understood as an official understanding apart from the Confidentiality inside it.
What Are The Key Points On Which A Founder Must Review in Investment Term Sheet?
The Investment Term Sheet for a privately owned business may consist of more detail. Here we are discussing what the organizers or founders need to cover the following points while considering a Investment Term Sheet:-
Kind of Shares and the Option
The funding financial investor tends to get into a preferred class of shares, and these offers appropriate rights that are not offered by founders and others like employees. Specifying the rights is a normal practice as the investment is made based on the company’s risk profile & valuation at that specific time. This is a crucial consideration in an investment term sheet.
This segment considers the agreed valuation of the company preceding the new money infusion. It is to decide the cost per offer to be paid by the investors. Usually, investors avoid the full investment value. However such investors invest in trenches i.e. stages that are liable to finish particular milestones. Inability to meet the milestone does not naturally mean that the investor will abandon the deal, it may mean that he might be looking for different terms for those amounts.
Investors usually invest in start-up companies to realize the best returns on investment on the capital value. This portion of the Investment Term Sheet 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 instalment.
This portion of Investment Term Sheet characterizes the liquidation inclinations of the investors; in the case if an organization is liquidated for some unknown reasons.
Favoured investors ordinarily get a specific measure of the returns previously than another investor. However, the structure and procedures of the liquidation are consulted to understand the risk in every investment process. The more the risk is, the more will be the required return. The investors must be preferred during this process of investment.
The senior employees, management, founders, and others who are responsible for the company growth are the main authority to make the decision whether or not to invest. Consequently, the investors are the key players who always stay connected with the plan and deal, so this portion of the investment term sheet provides the terms for the founder.
There are numerous other terms including recovery, anti-dilution, transformation, voting rights, and other different insurances composed into most Series a term sheets for both the investor as well as the founder. It's imperative to work with an accomplished legal advisor who can clarify the deal and documents in English and can make sure that you comprehend all the terms before you sign.
Term Sheet Format
There are different formats which are utilised for different arrangements related to a term sheet. The following format is for a term sheet for a typical merger and acquisition scenario:
- Name of the Parties- The name of the parties must be included here. If it is an agreement related to private acquisition or a merger then details related to the Buying Company, Selling Company and the Target Company must be mentioned.
- Type of Business- As the term sheet is for Mergers and Acquisitions, the type of products offered by the target company must be mentioned here. The type of products and services offered by the target company must be mentioned here.
- Consideration- Consideration will be the purchase price what is provided to acquire the target company. The form of consideration has to be mentioned to the seller whether the consideration is in cash or through the issue of shares or any other form of method.
- Payments- The terms related to the payment have to be provided in this term sheet. Whether cash is paid initially or the payments can be carried out through other processes.
- Requirements related to Due Diligence- The buyer would be given a chance to conduct due diligence for the above acquisition. The type of due diligence carried out by the buyer would be dependent on the conditions related to the deal.
- Conditions related to closing- If there are several conditions related to closing the deal. All the conditions have to be clearly mentioned before closing the deal.
- Binding Clauses- Any clauses which are binding have to be explitedly mentioned in the term sheet.
- Governing Law and Jurisdiction- Though the term sheet is non-binding when the parties agree to come to a binding contract, then the governing law and jurisdiction must mentioned.