What is a Term Sheet Review and How is it Done?
A term sheet is a non-binding document that lists the terms and conditions of an investment or other business agreement between parties.
It can be described as an outline or summary for future legally-binding documents to be drafted. Since it lays the foundation for those, you should review it closely before you agree to its terms.
Read the rest of this article to explore what’s typically included in a term sheet, how you can review it yourself, and when you should consult with a qualified lawyer for a thorough legal review.
What Information is Included in a Term Sheet Review?
A term sheet usually includes information about the investor’s intentions and key terms of the investment, such as:
- Purpose. This explains the reason for the investment and the parties’ goals, while mentioning all legal parties who are involved in it.
- Investment amounts. These describe the total amount of money the investor is putting into the company. It specifies payment terms, such as if the money will be paid in one lump sum or via installments.
- Company valuation. This refers to how much the company is worth, as this determines investor percentages. Such sections in the document provide transparency for the investor.
- Financial rights on exit. This defines how proceeds will be transferred, such as in the case of selling the company.
- Dividends. This section of the term sheet explains how and when investors will receive profits.
- Control. The document should outline the company’s board of directors and what rights to seats investors have.
- Covenants. In this section, you’ll read through a range of activities that the parties aren’t allowed to do during signing and closing the transfer. It needs to be clear to prevent disputes.
- Confidentiality. The addition of this term means that both parties need to agree to keep the business agreement private.
How Do You Review a Term Sheet?
Reviewing a term sheet is possible, but there are some important things to look for. Here’s a rundown of some.
Compare it to the Letter of Intent
When reviewing your term sheet, it’s good practice to check it across other business documents, such as a letter of intent.
A letter of intent is a non legally-binding document that describes basic terms of the transaction. These should be aligned with what’s included in the term sheet for consistency.
Validate the Seller’s Promises
You should check that the seller is providing truthful information about the company’s finances, including its debt and liabilities. This due diligence makes the transfer more favorable while protecting your interests.
Check the Financial Terms
Every term sheet contains a form of capital, such as common equity. It’s important to review this and its pros and cons. It will help you to confirm that you know your rights and understand what risks are involved.
Consider No-Shop Provisions
The seller must agree not to let other investors get access to the deal for a specific amount of time, usually 30 or so days. Check that these provisions are fair and reasonable.
Look at the Closing Provisions
The term sheet should include information about what conditions need to be met before the deal can close. These should be scrutinized closely. Remember to check for any post-closing conditions, such as indemnification claims.
Do You Need a Lawyer for a Term Sheet Review?
It’s advisable to hire a lawyer to review your term sheet review. This is because term sheets can be complex and filled with technical or legal language, while also containing some legally-binding clauses.
You want to ensure you understand everything in the document, which a lawyer can easily help you with.
During a legal review, a lawyer can help you in various ways, such as by:
- Checking that all the agreement’s terms are compliant with relevant laws and clarifying all legal clauses so that there are no hidden risks.
- Noting provisions or terms that could be limiting, such as by reducing your level of control.
- Clarifying confusing or vague wording in the contract that can cause issues or disputes. This also ensures that all clauses in the agreement are consistent.
- Checking that the document is consistent with other documents in the company.
- Negotiating with the other party for favorable or revised terms.
- Protecting your rights, such as in terms of exit options.
- Helping you with drafting the binding agreements that follow, ensuring that everything is clear, reasonable, and legally sound.
Where to Find a Lawyer for a Term Sheet Review
If you want to work with a qualified, professional lawyer to review your term sheet, you don’t have to worry about where to find one. There are online legal platforms that make the process of seeking legal guidance much easier, without you having to leave your home.
ContractsCounsel is one of the biggest online legal marketplaces that connects clients with experienced lawyers who have been vetted on the platform. All lawyers have the skills and years of experience in helping clients with the drafting and review of your term sheet as well as other, legally binding, documents.
When you want to request a legal review of your term sheet, here are the easy steps to follow.
1. Visit the ContractsCounsel marketplace and post your project for free.
2. You should include some details of your project so lawyers know what you require.
3. You’ll receive multiple lawyer bids from lawyers on the platform.
4. You’ll review the lawyers' profiles based on data provided on the platform, such as their location, years of experience, expertise, and client ratings.
5. Select the best lawyer according to your legal requirements. Hire them for the work.
