Term Sheet

A term sheet is a usually non-binding document containing the key terms of a planned investment. It summarises the conditions under which an investor would invest, such as valuation, stake, and rights. It serves as the basis before the final contracts are drafted. In venture capital its content typically covers pre-money and post-money valuation, the amount invested and the resulting ownership, the treatment of the option pool, the liquidation preference with its size and participation, anti-dilution protection, pre-emption and pro-rata rights, tag-along and drag-along provisions, the catalogue of matters requiring consent, board composition, information rights, founder vesting and leaver provisions, and conditions and timetable.

Not all points carry equal economic weight: liquidation preference, participation, option pool and anti-dilution often influence the actual distribution of proceeds more than the negotiated valuation, so comparing two offers on valuation alone is misleading. In practice it binds nonetheless, because departing from agreed key terms later requires considerable explanation and costs trust.

For acquisitions the content covers the object of sale, price and price mechanics, financing, conditions precedent, the scope of warranties, liability caps, the treatment of management and the timetable. Only individual clauses are usually binding, namely confidentiality, exclusivity for a period of typically four to twelve weeks, allocation of costs and governing law. Precisely these exceptions need careful drafting, because they are the only enforceable parts. The document is usually negotiated within a few weeks, because it forms the basis for starting substantive diligence.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.