Blog #Term Sheet

A non binding agreement consisting terms & conditions for the investment is known as Investment Term Sheet. An Investment Term Sheet is a non binding document except clauses related to confidentiality and governing law. It is a type of principle agreement which consist valuation. It mainly consist discussions on which parties have agreed informally. After preparation of terms sheet, a due diligence process shall be carried out. Eventually parties will sign the agreement. No contractual obligation has been created by the term sheet on investor to make investment and on the company as well as to issue shares to the investor. Under this, details of the investors are given, valuation of the company, and the amount of investment.

Every type of investment requires proper negotiations for which such type of document is required.  Investment Term Sheet is a non binding document under which terms & conditions are defined which are mutually agreed between the parties in relation to investment. Terms sheet is a non binding document thus do not have legal value and it cannot be enforced. It is drafted in a manner that no misunderstanding will occur in future. It will be treated as a reference document for drafting of legally binding contract.

Now let’s understand some of the features of term sheet. 

• Ample time is there for parties for better negotiations.
• It helps in eliminating the possibility of misunderstanding among the parties involved.
• It gives the clear description of the major aspects of the deal.
• It helps in removing the possibility of unnecessary disputes between the parties.
• A term sheet helps in ensuring that the expenses of legal charges which are involved under the drafting of legally binding contract have not incurred in the initial stage.
• It enables the parties to focus on business issues involved in transaction at the initial stage.
• In long run of the company it is always beneficial to invest time and resource in drafting term sheet for the company.

Elements of Term Sheet

• Details of the investor and the entity under which the investment is being made shall be mentioned under term sheet.
• Details of the mode of investment and the time period as decided.
• Details of Voting Right of parties
• Maintain proportionate ownership
• Draft Share purchase agreement, if required.
• Warranties & Representations,
• Terms related to Non-Competition & Non-Disclosure,
• Other Provisions

Above mentioned terms may be included in terms sheet as per requirement of transaction as well as on the basis of requirement of the parties.

Things to be considered by the parties in term sheet

An investment term sheet gives a base to future formation of legally binding agreements. At the time of making term sheet each & every clause and required provisions must be carefully analyzed, and proper discussion and negotiation should take place while preparing this. Every aspect and future impact should be considered while making.

While making investment terms sheet and during negotiations, professionals may be hired or consulted for experience outlook and also for unbiased approach. By this, an unambiguous and exhaustive document can be made.   You can contact us for the preparation of Investment term sheet as we have a team of professionals and we can assist you accordingly.

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Investments of every sort require negotiations and meeting of minds over the terms and conditions. It is here that ‘Term Sheet’ finds importance. Term Sheet is a non-binding document that outlines the terms and conditions with respect to the investment which is mutually agreed to by the parties.

Though a term sheet does not have a legal value and cannot be enforced, yet drafting it in a detailed manner ensures that the parties are on the same page and no misunderstanding shall crop in the future. A term-sheet shall then be a reference document for the drafting of a legally binding agreement or contract.

What are the features and benefits of Term Sheet?

• A term sheet lays the bedrock for ensuring that the parties involved in a business transaction agree on major aspects of the transaction.
• It gives the parties ample time for better negotiations & finishing up every facet of the terms of the transaction.
• It enables the parties to avoid the possibility of a misunderstanding between the parties at a later stage and the parties remain clear about major aspects of the deal.
• It lessens the likelihood of unnecessary disputes.
• A term sheet also ensures that the expenses of legal charges involved in the drafting of binding agreements or contract are not incurred from the initial stage.
• This encourages the parties to focus on the business issues in the transaction at the early stage.
• Investing time and resources in drawing a Term Sheet is always beneficial in the long run for the company.

What constitutes the Term Sheet?

• A term sheet shall mention the details of the investor and the entity in which the investment is being made,
• It shall be clear upon the mode of investment the time period if decided upon.
• Securities,
• Liquidation preference,
• Conversion,
• Voting Right,
• Protective provisions,
• Pre-emptive rights (to maintain proportionate ownership),
• Co-Sale Rights,
• Election of directors,
• Share purchase agreement, if to be drafted between parties,
• Option pool,
• Sale Transaction,
• Anti-dilution Provisions,
• Redemption Right,
• Representations and Warranties,
• Conditions to Closing,
• Management and Information Rights,
• Right to Participate Pro Rata in Future Rounds,
• Matters Requiring Investor Director Approval,
• Non-Competition and Non-Solicitation Agreements: Non-Disclosure,
• Employee Stock Options,
• Provisions of right of first refusal/co-sale etc.

These are some terms that may be mentioned in the investment term sheet but all should be as per individual transaction, the nature of the transaction as well as particular requirements of the parties.

What note of the Term Sheet must be taken by the parties involved?

Since a Term Sheet lays groundwork for the future formation of legally binding agreements, all the settled terms, clauses and provisions must be analyzed, discussed and negotiated thoroughly with all the aspects including that of future impact kept in mind.

It is advised that during negotiations and drawing up of the Term Sheet, a team of professionals must be consulted. It not only provides an experienced outlook to the transaction but also a fresh and unbiased approach which enables an unambiguous and exhaustive document to be made.