Terms Sheet: Definition, What's Included, What To Look For
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What Is a Terms Sheet?
A terms sheet is a nonbinding agreement between yourself as the company owner or representative and an investor that outlines the broader terms and conditions of an investment deal. Parties frequently use it as a template and starting point for the more detailed and legally binding documents that'll come in the future. Once the involved parties agree on the term sheet details, they'll move into the next step of forming the legal documents that facilitate the investment in the company.
Terms sheets are typically associated with startups because it's these companies that most often need more investment dollars to start the business or expand operations, but many companies planning on a merger or acquisition use it too. Having a term sheet actually attracts investors and venture capitalists to your company with the means to contribute financially to assist with growing your business.
It's obvious that investors find it appealing to be a part of a company that they believe will bring them a solid return on their investment for years to come. What's even more enticing is when that company has everything in order and the terms of a potential agreement laid out in a way that's clear and doesn't leave much room for misinterpretation or confusion.
While the term sheet doesn't have to go into every single detail or contingency of a deal, it should include the more important parts so investors can read through it and know exactly what they are getting into. Venture capitalists may have many deals in front of them, so as a business owner, you may find it easier to attract the funds you need when you make the process easy on your investor.
What to Include on a Terms Sheet
If it's time to draw up a terms sheet, it means you're at a place in your company when you could use extra funds. This is usually when you're doing really well and just need some investment dollars to expand operations or keep them going at the level and pace you're used to. Here is what most term sheets should include:
- Identification information: You should share your information as the business owner and the investor's information. This will show exactly who is a part of the terms sheet.
- Valuation: This is how much the company is worth, and something that investors will definitely want to know before investing their money to fund your enterprise. The valuation calculation can also include how many shares of the company have already been distributed and at what cost.
- Investment amount: The investment amount should be laid out clearly, so there is no confusion as to how much you're expecting as an investment.
- Percentage stake: The percentage stake is the percentage the investor will own of the company if the deal goes through. For example, if the percentage stake is 20%, then the investor will own 20% of the company, which could make them a majority shareholder depending on how the other 80% is broken up.
- Time frame: It's standard practice to allow for a certain period of time where the investor can go over the terms sheet and make a formal decision.
- Voting rights: Venture capitalists want to maximize their return on investment potential, so they may ask you as the business owner to give up some part of the voting rights in the company. While this can go any which way depending on the agreement, you may want to outline exactly how much voting rights the investor will have if they provide much-needed funding.
- Other provisions: It's typical to include additional provisions for items such as who is responsible for legal fees, an investor's right to company information and future investments, nondisclosure details, and founders' obligations.
A terms sheet should also clearly state that it is a nonbinding agreement, giving both the entrepreneur and the investor the ability to withdraw before legal paperwork is completed. If you want some additional tips on how to understand your term sheet, head to this article .
What to Be Wary of in a Term Sheet
While it would be ideal to have an uncomplicated investment process, you may come upon an investor who tries to institute a variety of provisions in the term sheet that don't benefit you as the company founder. Here are some things to be on the lookout for:
- Unfair financing: If part of your investor's dollars will serve as a loan for your business expenditures, make sure that the note details aren't so harsh that your company could become bankrupt in an attempt to repay it.
- Large controlling stake: Investors want to have some stake in the company, but some investors may ask for a large stake that would give them the biggest share and, therefore, the controlling portion of your company.
- Limiting terms: There are certain things that an investor may ask of you, but they may also want to limit how much fundraising you can go after in the future. Consider if this is beneficial for your business before agreeing to it in the terms sheet.
Image via Unsplash by officestock
Common Terms Found on a Term Sheet
Term sheets can include a lot of jargon that you may not be familiar with when you're just starting out as a business owner. Here are some common terms and their definitions:
- Valuation: You likely already know what the valuation of your company is, especially if you're at the point of needing investors, but you may see the terms pre-money valuation and post-money valuation listed. The pre-money valuation is the value of the company before you've received the new investment, while the post-money valuation refers to the value of the company that includes investment dollars.
- Drag along clause: This clause allows a major shareholder to require a minority shareholder to follow their lead in business decisions, particularly in the sale of a company.
- Dividends: Dividends are what is paid out to shareholders on a regular basis, usually quarterly, based on the company's profits.
- Pro-rata rights: These rights are given to an investor so they can also be a part of additional funding rounds later on. You may even see pay-to-play provisions that require investors to participate in future investment rounds or pay penalties if they don't.
- No-shop agreement: This agreement limits your relationship with other investors after you sign the term sheet. It's normal to have to wait a certain amount of time after signing the term sheet before starting another fundraising round, but the term sheet should outline an expiration date after which it's okay to seek additional investments.
Here is an article that shares additional term sheet terms to become familiar with.
Although a term sheet is not a binding contract , it's still important to know how they work and why they are beneficial for your business. Remember that without one, or even with one that's limiting and confusing, you'll spend more time, effort, and money in coming to an agreement with your investors.
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Darryl S.
Darryl S.
I offer flat/fixed fees rather than hourly work to help lower your legal costs and align our interests. I specialize in contract law and focus on making sure your contract is clear, protects your interests and meets your needs. You can expect fast, straightforward communication from me, making sure you understand every step. With my experience, you'll get a detailed review of your contract at a fair, fixed price, without any surprises. I have over 30 years of business and legal experience that I bring to your project. I graduated from The University of Texas School of Law with High Honors in 1993 and practiced at Texas' largest law firm. I have founded companies and so understand how to be helpful as both a lawyer and business owner.
"Excellent attorney! D was thorough, communicative, very helpful, and knowledgable about the relevant SaaS topics. Really appreciate his ethical and practical approach to the law--specifically lets you know if certain elements are unnecessary extras charges. I look forward to working with him and his team again in the future!"
Dolan W.
You need a lawyer who's more than just knowledgeable – you need someone who's on your side. That's where I come in. I'll be there every step of the way, offering clear communication and proactive solutions. Whether you're starting a business or navigating a complex legal matter, I'll help you make informed decisions and achieve your goals. I also have drafted many templates to save you money. Just use this link - https://www.contractscounsel.com/client/lawyer-profile/3764#Templates Why Choose Me? I put you first I'm proactive I'm efficient I'm accessible
"Dolan help me getting the TOS and Privacy policy review and revision completed way faster than the original contract period. And he is very responsive to all my quesitons and messages, we maintained a good communication at all time, he pay very high attention to details and have all the places in doubt commented in the doc, i would highly recommend him to anyone who is looking for TOS review."
Jane C.
Skilled in the details of complex corporate transactions, I have 15 years experience working with entrepreneurs and businesses to plan and grow for the future. Clients trust me because of the practical guided advice I provide. No deal is too small or complex for me to handle.
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Phocus L.
G'day, my name is Michele! I work with startups, entrepreneurs and small/medium-sized businesses across the country in a wide array of industries. I help them with all of their ongoing, daily legal needs. This includes entity formation, M&A, contract drafting and review, employment, asset sale & acquisition, and business sales or shareholder exits. I'm half-Australian, half-Italian, and I've lived the last 20+ years of my life in America. I've lived all over the USA, completing high school in the deep south, graduating cum laude from Washington University in St. Louis, and then cum laude from Georgetown University Law Center. After law school I worked for the Los Angeles office of Latham & Watkins, LLP. After four intense and rewarding years there, I left to become General Counsel and VP of an incredible, industry-changing start-up called Urban Mining Company (UMC) that manufactures rare earth permanent magnets. I now work for Phocus Law where I help run our practice focused on entrepreneurs, startups, and SMEs. I love what I do, and I'd love to be of help! My focus is on providing stress-free, enjoyable, and high-quality legal service to all of my clients. Being a good lawyer isn't enough: the client experience should also be great. But work isn't everything, and I love my free time. I've been an avid traveler since my parents put me on a plane to Italy at 9-months old. I'm also a music nut, and am still looking for that perfect client that will engage me to explain why Dark Side Of The Moon is the greatest album of all time. Having grown up in a remote, and gorgeous corner of Australia, I feel a strong connection to nature, and love being in the elements.
Samuel R.
My career interests are to practice Transactional Corporate Law, including Business Start Up, as well as Real Estate Law, Estate Planning Law, and Intellectual Property Law. I am currently licensed in Arizona, Pennsylvania and Utah, after having moved to Phoenix from Philadelphia in September 2019. I currently serve as General Counsel for a bioengineering company. I handle everything from their Business Transactional Agreements, Private Placement Memorandums, and Corporate Structures to Intellectual Property Assignments, to Employment Law and Beach of Contract settlements. Responsibilities include writing and executing agreements, drafting court pleadings, court appearances, mergers and acquisitions, transactional documents, managing expert specialized legal counsel, legal research and anticipating unique legal issues that could impact the Company. Conducted an acquisition of an entire line of intellectual property from a competitor. In regards to other clients, I am primarily focused on transactional law for clients in a variety of industries including, but not limited to, real estate investment, property management, and e-commerce. Work is primarily centered around entity formation and corporate structure, corporate governance agreements, PPMs, opportunity zone tax incentives, and all kinds of business to business agreements. I have also recently gained experience with Estate Planning law, drafting numerous Estate Planning documents for people such as Wills, Powers of Attorney, Healthcare Directives, and Trusts. I was selected to the Super Lawyers Southwest Rising Stars list for 2024 - 2026. Each year no more than 2.5% of the attorneys in Arizona and New Mexico are selected to the Rising Stars. I am looking to further gain legal experience in these fields of law as well as expand my legal experience assisting business start ups, and also trademark registration and licensing.
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I am Scott Mayer of The Mayer Law Group, Professional Corporation (please see my law firm website: mayerlawgroup.us, and my professional references on the site). I have been a successful California real estate attorney for over 30 years. I am unique as I am a real estate lawyer, broker, and developer who has experience with every aspect of real estate. I have managed three real estate platforms, including a national real estate development firm, a real estate family office with over $1 billion of commercial real estate under management, and serving as the Chief Real Estate Officer for Orange County, CA. I have managed the purchase and sale of over 125 commercial and residential properties, including the negotiation of purchase and sale agreements and the handling of due diligence, financing, and closing matters. I have negotiated over 225 commercial and residential real estate leases. I have managed the ground-up development of over 70 real estate projects. Most importantly, I am client-centric attorney who enjoys counseling clients on real estate matters. My role is to make sure my client's questions are answered, transaction issues are discussed and resolved, and my client's goals are successfully met.
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Tyler J.
I am an attorney licensed in California and Washington State with 4 years of experience. I spent three (3) years at a national law firm in the litigation practice section in the Los Angeles and Orange County offices. My experience also includes my current position of general counsel for a credit card processing company in Washington. I have been in this role for just over one (1) year. My expertise includes commercial litigation, securities litigation, FINRA arbitration, employment law, and general corporate law matters.
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Startup
Terms Sheet
California
What are the most important things to look at in a term sheet?
I am expecting to get a few term sheets from investors in the next month. I want to know what I should be looking for.
Ramsey T.
Every term in a term sheet, by definition is important. A term sheet is a summary of the most important parts of a "deal" - a way of getting to and negotiating the hear of the deal before filling in the gaps with boilerplate. Therefore, you should make sure that you understand all of what has been proposed and negotiated in the term sheet - even the provision that don't seem that important - because they wouldn't be in the term sheet if they weren't a key term to one side or the other.
Transactional
Terms Sheet
Washington
Can you explain the key provisions typically found in a term sheet for a business partnership?
I am in the early stages of negotiating a potential business partnership with another entrepreneur, and we have been advised to create a term sheet to outline the main terms and conditions of our agreement. However, I have limited knowledge about term sheets and would like to understand the key provisions that are typically included in such documents. I want to ensure that our term sheet covers all necessary aspects and protects both parties' interests before we proceed with further negotiations or legal documentation.
Jonathan W.
There are a couple of strategies for drafting term sheets. They can be extremely comprehensive leaving little material to the definitive documents or they can be very high level leaving most of the material terms to the definitive agreement. My preference and I think it often saves on legal costs is to have a very detailed term sheet. The reasons high-level ones are often used is because there is a need to get to a signed term sheet, the parties know each other or there is some other urgency that leads to having a less-than-detailed term sheet. The basic sections in a term sheet are: PART ONE (non-binding provisions) 1. BASIC TRANSACTION. Summarizes structure of transaction. 2. PRICE/ECONOMICS 3. OTHER TERMS. Both parties agree to be honest and straightforward in their warranties and representations. PART TWO. The following are the legally binding and enforceable agreements of the Parties. 1. ACCESS. Both parties shall provide access to any information the other entity may require throughout the transaction. 2. EXCLUSIVE DEALING. Both parties agree to stop looking for a similar entity to partner with. 3. BREAK-UP FEE (only in the M&A context but could be for a business deal to compensate party for other parties breach) 4. CONDUCT OF BUSINESS. Regular business should occur at both entities throughout the transaction. 5. CONFIDENTIALITY. Both entities will keep all materials, conversations and knowledge gained confidential. 6. DISCLOSURE. Both entities will not discuss the proposed transaction with anyone until completed then they will issue a press release together. 7. COSTS. Both entities pay their own professional service fees. 8. CONSENTS. Both entities will follow appropriate internal legal process/approval. 9. ENTIRE AGREEMENT. This document supersedes all previous documents and/or other forms of communication relating to this transaction. 10. GOVERNING LAW. The Binding Provisions will be governed by and construed under the laws of the State of [Washington] without regard to conflicts of laws principles. 11. JURISDICTION: SERVICE OF PROCESS. Defines how legal proceedings will work regarding this document. 12. TERMINATION. States when this document will expire. 13. COUNTERPARTS. Covers how the contract is signed. 14. NO LIABILITY. The past is wiped clean by this document, with respect to historical dealings between the two entities.
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