A term sheet is a non-binding agreement between a startup and an investor that outlines the terms and conditions of an investment deal. It is an important document that lays the foundation for a future investment agreement and helps both parties understand the key aspects of the investment. In this guide, we will walk you through the process of understanding and creating a term sheet.

What is a Term Sheet?

A term sheet is a preliminary agreement between a startup and an investor that outlines the terms of the investment deal. It is a non-binding document, meaning that the terms and conditions outlined in the term sheet are subject to change during the negotiation process. A term sheet provides a roadmap for the negotiations and sets expectations for both the startup and the investor.

The term sheet typically includes information on the size and structure of the investment, the valuation of the company, the rights and responsibilities of the investor and the founders, and any special provisions or conditions for the investment. The goal of the term sheet is to establish a common understanding of the key terms and conditions of the investment and to reduce the risk of misunderstandings and disputes later on.

Why is a Term Sheet Important?

A term sheet is an important document for several reasons. Firstly, it provides a clear and concise summary of the key terms and conditions of the investment, reducing the risk of misunderstandings and disputes later on. Secondly, it serves as a starting point for negotiations between the startup and the investor. Thirdly, it provides a clear roadmap for the negotiations, setting expectations for both parties and helping to ensure that negotiations move smoothly and efficiently.

What to Include in a Term Sheet

The contents of a term sheet can vary depending on the specific needs and circumstances of the investment, but it typically includes the following key elements:

1. Investment Size and Structure: This section outlines the amount of investment being sought, the type of investment (e.g., equity, debt, convertible note), and the terms and conditions of the investment.
2. Valuation: This section provides information on the valuation of the company and how it was determined. It may also include information on the post-investment valuation and the mechanics of the investment.
3. Rights and Responsibilities of Investors and Founders: This section outlines the rights and responsibilities of both the investor and the founders, including information on board seats, voting rights, and information rights.
4. Exit Provisions: This section provides information on the exit strategy for the investment, including information on the conditions under which the investment can be redeemed and the mechanism for doing so.
5. Special Provisions and Conditions: This section outlines any special provisions or conditions that apply to the investment, such as the requirement for the founders to maintain a certain level of insurance coverage or the requirement for the company to maintain a certain level of profitability.

How to Create a Term Sheet

Creating a term sheet requires careful thought and consideration. Here are some steps you can follow to create a term sheet:

1. Determine the size and structure of the investment: This step involves determining the amount of investment being sought and the type of investment (e.g., equity, debt, convertible note).
2. Determine the valuation of the company: This step involves determining the valuation of the company and how it was determined.
3. Determine the rights and responsibilities of the investors and founders: This step involves determining the rights and responsibilities of both the investor and the founders, including information on board seats, voting rights, and information rights.
4. Determine the exit provisions: This step involves