Term sheet

A term sheet is a non-binding agreement between an investor and a startup. The document is about the basic terms and conditions of the future investment.

When a venture capital investors is interested in a company, he arranges meetings with the management. During the meetings, the operation of the company, its business model, the personality and experience of the managers are examined. If the investor decides that it is worth investing capital in the in the target company, he prepares a non-binding letter of memorandum of understanding for the company. This statement of memorandum of understanding is called a term sheet in the in the startup ecosystem. 

The purpose of the term sheet is not to clarify all details regarding the further operation of the company selected for investment. This statement of memorandum of understanding focuses on the most important cornerstones. It assures the parties involved in the business transaction that the other side interprets the main points in the same way. This can avoid possible misunderstandings and fruitless disputes. This also means that premature, unnecessary legal costs can be avoided.

A key element of a term sheet 

• business/company valuation designated for investment, 
• the amount of investment, 
• the proportion of the transferred ownership share, 
• voting rights, 
• preferences for later sharing of results, 
• anti-dilution provisions of the investment,
• additional other stipulations of the investor. 

It must be recorded in the term sheet 

• the list of assets involved in the transaction, 
• the initial acquisition price,
• the time interval within which the target must respond to the offer. 

The conditions and important points offered by the investor are usually fixed. Less important conditions are often negotiable and can be renegotiated. 

If an investor already offers a term sheet to the startup, his intentions are mostly serious. This letter of memorandum of understanding means that you have examined the company's operation, market, and environment in sufficient depth and that it has met all the preliminary screening criteria. A term sheet received from a well-known investor can attract the interest of other investors.

After the acceptance of the term sheet, the joint work related to the investment can start. At that time, the startup can continue its activities, but a more detailed legal due diligence will be initiated. As a result, a much more developed and already legally binding syndicate agreement can be reached between the parties for further cooperation.