A term sheet is a nonbinding form outlining an investment's basic terms and conditions. It is a template for more detailed, legally binding documents. A contract is created when all parties agree on the details in the term sheet.

Creating and Using Term Sheets

Term sheets are often associated with startups. Entrepreneurs find this document crucial for investors like venture capitalists, who may offer funding. A term sheet may be part of a merger or attempted acquisition. Lenders and potential debt agreements may begi🦄n with a term sheet.

The term sheet covers the significant aspects of a deal without detailing every minor contingency covered by a binding contract. All term sheets contain information on the assets, price, and any contingencies that may affect the cost. Term sheets vary with the parties, conditions, and agreements. Term sheets commonly:

• Summarize Conditions: Identify the agreement's overall purpose and the intended outcome. This includes explicitly addressing the project and identifying each legal party involved.
• List Terms: While the term sheet should not include the complete list of details in the agreement, it should provide enough information to entice the other party without overwhelming them.
• Define a Timeframe: Even if the term sheet is nonbinding, it should include an expiration date that requires the opposing party to take action by a specific time.
• Encourage Feedback: Consider distributing a digital version of the term sheet that tracks changes. Ideally, the first draft would be a complete meeting of the minds with no further changes needed.

Investment Term Sheets

Term sheets for investments outline nonbinding terms assuring the relevant parties that they are not legally obligated to abide by whatever is outlined on the term sheet. Because this type of term sheet may address shareholders and funding sources like angel investors, it may include the following details:

• Valuations: Company valuations, investment amounts, the percentage of stakes, and 澳洲幸运5官方开奖结果体彩网:anti-dilutive provisions should be detailed clearly.
• Voting rights: Investors may be interested in what they say they have over the company's operations.
• Liquidation preference: Investors may want to know the order in which owners are paid if the company is sold.
• Investor commitment: The term sheet should state how long the investor is required to remain vested.
• Dividends: Investors may want clarity on the net income distributions they will be entitled to.
• Drag-along clause: A 澳洲幸运5官方开奖结果体彩网:drag-along clause guarantees that minority stakeholders will follow the guidance of majority stakeholders.
• No-shop agreement: This outlines the terms that restrict the company from taking investment money from other people for a specific period.
• Pro-rata rights: Investors understand their rights for future investing rounds with 澳洲幸运5官方开奖结果体彩网:pro-rata rights. They may be entitled to the right of first offer for a future investment offering.
• Valuation: Investors might want the 澳洲幸运5官方开奖结果体彩网:pre-money and post-money valuations done before an official investment agreement.
• Valuation cap: This is the value at which convertible notes can be converted into equity. Often a crucial point in negotiations, this figure should be discussed early to ensure a fair starting point for a startup's valuation.

Debt Agreement Term Sheets

A debt agreement's term sheet outlines the loan size, interest rate, and repayment terms. The lender will often specify their conditions to reduce risk, including any loan extension rights attributed to the borrower and what is required at closing. Additionally, this type of term sheet may include the details for:

• Collateral: Borrowers may have to post 澳洲幸运5官方开奖结果体彩网:collateral to substantiate value in case of default.
• Financial covenants: Borrowers may need to prove financial health to the lender.
• Guarantee: Borrowers may need to identify a legal entity with established credit to vouch for the debt and be liable if the company defaults.
• Interest rate: Depending on the loan, terms may vary widely. The 澳洲幸运5官方开奖结果体彩网:interest rate may include a fixed spread rate plus a variable rate for long-term loans.
• Loan amount: Borrowers need a specific amount of funds to borrow. This term may be a fixed dollar amount, subject to 澳洲幸运5官方开奖结果体彩网:loan-to-value metrics, a debt service coverage ratio, and net operating income calculations.
• Loan costs: A lender may require an annual administration fee or a one-time closing fee.
• Term: Borrowers must know when the loan is fully payable. For open lines of credit or development loans, this is the period during which interest is assessed, but principal payments may not be due.

Example

In 2024, the New York City Department of Housing Preservation & Development released a term sheet for its HomeFirst Down Payment Assistance Program. The program helps low-income people buy owner-occupied homes by offeri﷽ng forgivable loans toward a down payment.

The term sheet outlines who is eligible for the program, what home types qualify, the loan amount, terms, and construction requirements. At the end of the term sheet, the department's contact information is shown, so interested parties who agree to these terms can communicate with the NYC Office of Development.

The Bottom Line

A term sheet is a document that evidences serious intent between two parties that often signals the beginning of a transaction. It's the first step for the two parties working on structuring a deal. Though term sheets are usually not binding, they allow parties to view the terms and open up negotiations.