What is Term Sheet Drafting?
A term sheet is a non-binding document that explains the basic conditions in a business agreement, such as an investment. It’s common to see term sheets during a startup’s Series A funding round.
If you’re drafting a term sheet, you’ll want to make sure it’s detailed as this document provides the foundation for a legally-binding contract. And, some of its clauses, such as those related to confidentiality, can be legally binding.
If you don’t know how to draft the term sheet you require, read the rest of this article. We’ll explore key terms to include in a term sheet, how to draft it, and why you should consider hiring a lawyer to help you navigate the process.
What are Key Terms to Include in a Term Sheet?
Although term sheets can vary depending on the deal or business activity for which they’re drafted, there are some common terms they might include.
- Company valuation. This specifies the company’s worth, and it’s used to calculate investor percentages.
- Investment amount. This explains how much money an investor is contributing to the company.
- Authority. A term sheet should state the authority of the company’s board of directors and what seats investors can gain.
- Confidentiality. This is a legally-binding clause in the term sheet that serves to protect sensitive company information.
- Exclusivity. This is another legally-binding clause that prevents the company from finding other investors for a specific amount of time.
- Equity. The investor’s percentage stake they will receive for their funding must be properly defined.
- Anti-dilution provision. This can be included in a term sheet to prevent investors from their ownership percentage being diluted in future funding rounds.
- Voting rights. It must be clarified what decisions require shareholder approval and who will sit on the board of directors.
What are Tips for Drafting a Term Sheet?
When drafting a term sheet, there are some things to bear in mind so that it’s accurate and serves as a foundational document for future agreements.
Include a Summary of the Agreement
Your term sheet should provide a summary of the main purpose of the agreement, such as by detailing a project partners are working on and specifying what parties are involved.
Consider Getting Feedback
A term sheet is usually negotiated so that final terms can be included in the legal contract. It’s good practice to get feedback on the term sheet from other parties, such as founders, so that everyone is happy with what’s being outlined.
Mention Closing Provisions
It’s important to consider what happens when the deal closes. Include what conditions must be met or any post-closing conditions of which parties should be aware.
Provide Information Rights
An information right clause should be included in your term sheet to encourage transparency with your investors. It enables investors to access your company’s financial and strategic information.
Discuss Liquidation Preferences
You might want to include a clause in your term sheet that specifies what happens during business liquidation, such as if certain investors are given a preference and will receive payouts earlier than others. This is usually determined by the size of their contribution.
Signatures and Next Steps
Your term sheet will include signatures of both parties to confirm they want to establish a formal agreement. You should also state a timeline by when the investor or business must take action, and what this entails. For example, it could be that parties agree to sign the formal agreement within 30 days of accepting the term sheet.
Do You Need a Lawyer for Term Sheet Drafting?
It’s advisable to hire a lawyer to draft a term sheet for you so that it’s valid and clear to help you encourage investments.
A qualified, experienced lawyer can help you during the drafting process by:
- Ensuring that all the agreement’s terms are compliant with relevant laws to minimize your risks.
- Noting certain desired provisions that could be limiting, such as by reducing your level of control. They will make more appropriate provisions.
- Avoiding the use of confusing or vague wording in the contract so that you minimize your risk of disputes.
- Checking that the document is consistent with other documents in the company.
- Negotiating with the other party for favorable or revised terms.
- Reviewing your term sheet if you’ve already drafted it so that you feel confident about its terms.
Where to Find a Lawyer for Term Sheet Drafting
If you’d like to find and hire an experienced lawyer to assist you with drafting a term sheet, online legal marketplaces make this process easy. You don’t even have to leave your house.
On ContractsCounsel, which is one of the biggest online legal marketplaces that connects clients with experienced lawyers, you can connect with experienced lawyers who have been vetted on the platform. They have the skills to draft legally-solid and clear documents to safeguard your interests.
If you want to request a legal drafting of your term sheet, here are the easy steps to follow.
- Visit the ContractsCounsel marketplace and post your project for free.
- Try to include some details of your project so lawyers know what you require.
- You’ll receive multiple lawyer bids from lawyers on the platform.
- Review the lawyers’ profiles based on data provided on the platform, such as their location, years of experience, expertise, and client ratings.
- Choose the best lawyer according to your legal requirements and hire them to draft a term sheet for a flat fee.
