Term Sheet

An investment term sheet works like a bridge between investors and entrepreneurs. Equally important from both sides, Term Sheets hold the power of initiating and completing investment transactions and help StartUps grow!
Nowadays, all Investors and Founders draft investment term sheets to strengthen their negotiation rounds. So, as a young entrepreneur today, it is important to understand what a Term Sheet is.

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INTRODUCTION

WHAT IS A TERM SHEET?

A Term Sheet is a legal agreement that sets out the basic terms and conditions of a proposed investment transaction. Not legally binding, a term sheet provides the founders and investors of a company an equal chance of presenting their views regarding a future investment to be made.

As a fact, Term Sheet is not legally binding upon any of its parties. However, the Term Sheet is backed by certain legally binding agreements that define the complete process of a particular investment transaction. One such document is the Shareholder and Share Subscription Agreements (SSSHA).

BENEFITS OF AN INVESTMENT TERM SHEET

It is quite fascinating how a legally non-binding agreement can become such a fundamental document for fundraising. There are multiple benefits of having an investment term sheet, such as:

Outlines terms for investment transactions

All StartUp owners can agree on the fact that investment transactions tend to get lengthy and tedious sometimes. So, when Companies and Investors have access to one sheet which has all the basic important details of proposed investment transaction, it gives them a chance to relax.

Minimizes the probabilities of a dispute

Even though an investment term sheet has a non-binding effect, it covers all the essential aspects of an investment round. These aspects are also then negotiated between all the parties with their legal team by their sides to finalize the Investment round.

Helpful in Negotiation rounds

When the parties are given a chance to negotiate before entering into a contract, the business owner and the investor both can take all measures to act in their best interests. This helps the parties to modify the terms before signing the contract.

Non-Binding effect

This can be considered the most important benefit of an investment term sheet. The basic purpose of a term sheet is that it creates an opportunity to settle down all the important aspects of fundraising before it becomes legally binding on the parties. Hence, this option to put their points across saves a lot of time, costs, and energy for all involved.

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KEY CONSIDERATIONS OF A TERM SHEET

An investment term sheet includes all major points of discussion between Investors like Venture Capitalist, Angel Investors etcetera and Founders about the relationship, roles, and duties post investment. Hence, it is very important to cover certain points in an investment term sheet without fail, few of them are:

Details of all parties

To set out clear rights and liabilities, it is very important to know the parties involved. Hence, a term sheet should clearly define who the promoters/founders/directors are and who the Investor is.

Details of Proposed Transaction

This section of a term sheet focuses on all the basic details that the investment transaction will hold. This includes the valuation of a company, investment amount, anti-dilution provision, and shareholding structure.

Non-Binding effect

In a term sheet, it is important to clarify the extent to which it is binding upon the parties. However, it must also be mentioned that the term sheet does not mean to form any obligation on either of the parties, and it is just a basic document to set out certain rights and obligations before entering into contract.

Liquidation Preference

This means, that a term sheet should also include how the proceeds will be divided amongst the investor and promoters in the event of liquidation.

Board of Directors

A venture capital term sheet must have the composition of the BoD (“Board of Directors”), the quorum, the voting rights, etc. In certain cases, the investor shall also have affirmative voting right – in certain business matters.

Share transfer

If there are any restrictions on the transfer of shares, they should also be mentioned in an investment term sheet.

Exit Options

Through this clause, the investors are provided an option to exit the investment after a certain time. The options for exit can be mutually decided by the parties based on their preferences.

Thus, keeping these considerations in mind, a carefully curated investment term sheet has the power to be beneficial to investors, the StartUp/company/business as well as its founders.

Leave your confusions aside and invest in healthy negotiating points with investors, get your Investment Term Sheet drafted with Experts at Legalwiz.in.

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Why Choose LegalWiz.in?

We are a legal tech online service provider. Being a StartUp and having a team filled with experienced lawyers and company secretaries, we understand the importance of raising funds and how complex the process can turn out to be. However, if you choose Legalwiz.in to get your investment term sheet, we can turn this complex process into a simple, easy, and cost-effective process.

FAQs

Frequently Asked Questions

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Who prepares the Term Sheet?

If you are getting an investment from a fully functioning venture capital firm there are high chances that they will provide you with the term sheet. However, if you are dealing with an investor or more accurately an angel investor, who isn’t much aware of the functioning of laws, they might ask you as a company to prepare the investment term sheet. It is legally acceptable for any of the parties to draft a term sheet.

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Is the term sheet legally binding?

No, a venture capital term sheet is just a basic document that covers the major provisions of StartUp investment. Hence, it is usually not legally binding. However, all other agreements arising from and being entered into after the negotiations from the term sheet are completely binding such as the ShareHolders’ Agreement, or any employment contract – will be legally binding on all its parties.

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Is a term sheet a mandatory document?

No, the term sheet is not at all mandatory under the laws of India. However, it works like a planner or a guide which makes the process of completing an investment round very flexible and easy. Hence, it is always advisable to have an investment term sheet before raising any funds from a third-party investor.

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How long does it take to finalize a term sheet and enter into an investment transaction?

This is completely dependent upon the rounds of negotiations between the business owners and investors. It can be completed in one or two weeks and can last months. A major factor involved is how the interests and conditions of both parties are protected in the term sheet. If you have a term sheet that focuses on safeguarding the rights of all persons involved, the negotiation rounds won’t take much longer.

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How is a Term Sheet related to the Share Holders and Share Subscription Agreement (SSHA)?

Once a Term Sheet is discussed and finalized, the parties enter a valid and legally binding agreement that governs the investment transaction. This legally binding agreement is also known as the SSSHA. Once the SSSHA comes into effect, the term sheet automatically dissolves.

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Term Sheet

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WHAT IS A TERM SHEET?

BENEFITS OF AN INVESTMENT TERM SHEET

Outlines terms for investment transactions

Minimizes the probabilities of a dispute

Helpful in Negotiation rounds

Non-Binding effect

KEY CONSIDERATIONS OF A TERM SHEET

Details of all parties

Details of Proposed Transaction

Non-Binding effect

Liquidation Preference

Board of Directors

Share transfer

Exit Options

Why Choose LegalWiz.in?

Frequently Asked Questions

Who prepares the Term Sheet?

Is the term sheet legally binding?

Is a term sheet a mandatory document?

How long does it take to finalize a term sheet and enter into an investment transaction?

How is a Term Sheet related to the Share Holders and Share Subscription Agreement (SSHA)?

More Questions? Seek Help of an Expert

We take pride! Not in our work, but in your words.

Helpful Resources

Understanding Various Types of Venture Capital Funding

What Is Shareholders’ Agreement?

Documents Required to Seek Funding for Startups

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