Term Sheet
Term Sheet
BUS605: Venture Capital and Private Equity
Term Sheet “A term sheet is a non-binding agreement setting forth the basic terms and condition under which an investment will be made. The term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up” (Investopedia, 2013). “The most important term in a term sheet is the percentage ownership of the company granted to the investors in return for their investment” (Berkery, 2008). A term sheet is not a legal promise to invest. The term sheet doesn’t guarantee money coming in the door. The term sheet is only a contract to the extent that: it requires you to keep negotiation confidential and it may prevent the company from looking at other suitors for a period. “The first thing a term sheet does is supply you with the means to calculate your economics, although doing so can be rather involved as you can manipulate various terms to arrive at wildly different ownership stakes and economic outcomes while keep the nominal “valuation” the same. Taking the terms in their usual order on a term sheet [i.e., in order of growing complexity]” (Foundersfund, 2013).
“The term sheet, or letter of intent, is a key document in a venture capital transaction. Whether the initial agreement as to terms is structured as a term sheet or a letter of intent is merely a technicality; the choice of designation is largely one of personal preference with no substantive effect. For simplicity, in this section we use the phrase “term sheet” to describe the initial agreement as to the terms of the transaction. By focusing on the term sheet, the Company and the venture capital investor (the Investor) can direct their attention to the major business and structural issues involved in the proposed investment. The parties
BUS605: Venture Capital and Private Equity
Term Sheet “A term sheet is a non-binding agreement setting forth the basic terms and condition under which an investment will be made. The term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up” (Investopedia, 2013). “The most important term in a term sheet is the percentage ownership of the company granted to the investors in return for their investment” (Berkery, 2008). A term sheet is not a legal promise to invest. The term sheet doesn’t guarantee money coming in the door. The term sheet is only a contract to the extent that: it requires you to keep negotiation confidential and it may prevent the company from looking at other suitors for a period. “The first thing a term sheet does is supply you with the means to calculate your economics, although doing so can be rather involved as you can manipulate various terms to arrive at wildly different ownership stakes and economic outcomes while keep the nominal “valuation” the same. Taking the terms in their usual order on a term sheet [i.e., in order of growing complexity]” (Foundersfund, 2013).
“The term sheet, or letter of intent, is a key document in a venture capital transaction. Whether the initial agreement as to terms is structured as a term sheet or a letter of intent is merely a technicality; the choice of designation is largely one of personal preference with no substantive effect. For simplicity, in this section we use the phrase “term sheet” to describe the initial agreement as to the terms of the transaction. By focusing on the term sheet, the Company and the venture capital investor (the Investor) can direct their attention to the major business and structural issues involved in the proposed investment. The parties
References: Berkery, D. (2008). Raising venture capital for the serious entrepreneur (1st ed.). New York, NY: McGraw-Hill. BloombergBusinessweek. (12, October 2013). Retrieved from: http://www.businessweek.com/stories/2008-08-15/how-to-negotiate-a-term- sheet-part-ibusinessweek-business-news-stock-market-and-financial-advice Foundersfund. (09, October 2013). Retrieved from: http://www.foundersfund.com/uploads/term_sheet_explained.pdf Fundingpost. (14, October 2013). Retrieved from: http://www.fundingpost.com/investor- presentations/How-Venture-Capital-Firms-Work.asp Investopedia. (10, October 2013). Retrieved from: http://www.investopedia.com/terms/t/termsheet.asp Morganlewis. (13, October 2013). Retrieved from: http://www.morganlewis.com/documents/erh/ERH_PreparingAVentureCapitalTer mSheet_ELSCDeskbook.pdf National Venture Capital Association (NVCA). Retrieved from: http://www.nvca.org/ Scottrade. (13, October 2013). Retrieved from: http://research.scottrade.com/public/knowledgecenter/education/article.asp?end= true&docId=4192e85b45d148ccbf1f285f03173a5a