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Whether you're considering investing in a startup or are on the other side of the fence and keen to take on a new investor, a term sheet will help both parties agree on the most important aspects of the deal.
Find out what you need to know to prepare your own document including what's included, how to write one and where to find free templates online.
What's in this guide?
- What is a term sheet?
- When should I use an investor term sheet?
- Investor term sheet vs letter of intent
- What does a term sheet include?
- How effective is an investor term sheet?
- Do I need a lawyer to write a term sheet for investors?
- Get access to customisable term sheet templates online
- How do I write a term sheet?
- Where to get free legal documents and templates such as an investor term sheet
What is a term sheet?
A term sheet for investors establishes the general terms of them joining a business. It is a nonbinding agreement that serves as a basis for a more detailed and legally binding document.
The term sheet lays out the basic terms and conditions of an investment so that the parties involved can reach a more formal agreement.
Download this term sheet template at Lawpath
When should I use an investor term sheet?
Term sheets are most commonly used with startups, but can also be used to attract investors to help fund a business venture.
Investor term sheet vs letter of intent
Both a term sheet and a letter of intent (LOI) are preliminary, non-binding documents meant to record two or more parties' intentions to enter into an agreement. The difference between the two is mostly a matter of style.
A LOI is commonly written in letter form and focuses on the parties' intention while a term sheet skips the majority of the formalities and lists the terms in bullet-point format or similar. Generally, a LOI refers to the final form while the investor term sheet is more of a proposal.
What does a term sheet include?
Each agreement should be unique to the particular business, but these are the usual clauses you can expect to find in an investor's term sheet:
- Investment and valuation. This clause sets out the amount to be invested, the minimum and maximum round size, the company's valuation and whether the employee share option plan is part of the pre or post-investment valuation.
- Preference share terms. A section to negotiate whether ordinary or preference shares are offered.
- Employee share option plans. This is a pool of equity set aside to be offered to new employees to attract and retain talent. An investor might request to include this share pool in the fully-diluted pre-money valuation.
- Vesting. Some investors require the founders' shares to be subject to vesting which means that the founders have to earn them over time. Vesting is a way to incentivise the founders to remain with the startup in its most crucial early years.
- Leaver provisions. Leaver provisions require the founders to sell their shares back if they leave.
- Founder sale restriction. This provision prevents a founder from selling a stipulated proportion of their vested shares without approval.
- Board and control. An investor might negotiate for the right to appoint a board observer or director.
- Conditions precedent to completion. The investor term sheet will usually require specific conditions to be fulfilled before completion will take place. These can include that due diligence has been performed on the startup, that the company has raised a set minimum amount before a certain date and that the company has obtained all required approvals.
- Capitalisation tables. For full transparency, term sheets generally contain a pre- and post-completion capitalisation table.
- Subscription agreement provisions. This clause highlights whether the company and founders are required to give any warranties. It will also set out any other important subscription agreement terms that an investor may expect to find.
- Shareholders agreement provisions. These terms could include how decisions must be made, shareholder restraints and pre-emptive rights on issue and transfer of shares.
- Confidentiality. This is usually one of the only binding clauses found in an investor term sheet stating that the involved parties cannot discuss its terms with anyone else.
- Exclusivity. Another binding clause for founders to not 'shop around' for other investors until the expiry date of the term sheet.
How effective is an investor term sheet?
The term sheet is a non-binding document that helps an investor and business focus on the key commercial terms of an investment. A well-written document helps to illustrate the negotiated terms and clearly states the intention of both parties to enter into a legally binding agreement in the near future.
Do I need a lawyer to write a term sheet for investors?
As neither the investor nor the founder are legally obligated to abide by the terms outlined in a term sheet, a lawyer is not generally required.
Get access to customisable term sheet templates online
Does your company belong in this list?
How do I write a term sheet?
An investor term sheet should include the significant parts of a deal without detailing the minor contingencies you would usually find in a binding contract. The company valuation, investment amount, investor commitment, percentage stake, liquidation preference, voting rights and anti-dilutive provisions are some items that should be included.
Where to get free legal documents and templates such as an investor term sheet
- Corporate Finance Institute. Corporate Finance Institute is a provider of online financial modelling and valuation courses, offering a terms sheet guide and template for you to write your own.
- Lawpath. Lawpath is an online legal resource for small businesses and entrepreneurs. You can view a free sample of a term sheet and can sign-up to access customisation options.
- Y Combinator. Y Combinator provides seed funding for startups. You can find a term sheet template along with a guide on how to use one on its website.
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