Term sheet: Guide to the use of term sheets

What is a term sheet?

A term sheet is an essential and useful tool when agreeing on and realising investments in companies. A term sheet defines the main terms and conditions of the investment and serves as a basis for negotiating the final investment and shareholders' agreement between investor and company.
Term sheets are often used by startups and growth companies that need to bring investors on board in order to smooth the negotiation process by taking some of the discussions up front.

Why use a term sheet?

There are several good reasons for using a term sheet, including:

• it provides an overview of the key points of the investment and shareholders' agreement,
• it aligns expectations between the company and the investor at an early stage, and 
• it facilitates the best possible collaboration to get the investment in place as quickly and inexpensively as possible.

What should be included?

A term sheet typically outlines the investors' intentions and the key terms of a potential investment, including the investment amount, valuation of the company, financial rights on exit, dividends, voting rights in special situations, retention of founders, matters relating to the investment such as costs, due diligence, guarantees and time horizon. A term sheet should always include a cap table showing the current and contemplated distribution of ownership after an investment.

Do you need assistance or advice on term sheets? 

We sometimes see that startups and growth companies begin drafting and agreeing on the term sheet themselves and only later in the process seek legal assistance. This is rarely a good idea, because legal assistance can often make a huge difference at the term sheet stage, helping you align your company's and the investors' interests and expectations before drafting the final contract documents. Although a term sheet is usually not legally binding, it sets out the principal lines of the agreement and leaves much less room for negotiations afterwards. 

We have drafted countless term sheets and investment and shareholders' agreements, and we understand the importance of good and swift term sheets. Reach out to us if you need help with a term sheet or another investor agreement.