Term sheet

A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. After a term sheet has been "executed", it guides legal counsel in the preparation of a proposed "final agreement". It then guides, but is not necessarily binding, as the signatories negotiate, usually with legal counsel, the final terms of their agreement.

A term sheet implies the conditions of a business transaction, as proposed by a party. It may be either binding or non-binding.

Term sheets are very similar to "letters of intent" (LOI) in that they are both preliminary, mostly non-binding documents meant to record two or more parties' intentions to enter into a future agreement based on specified (but incomplete or preliminary) terms. The difference between the two is slight and mostly a matter of style: an LOI is typically written in letter form and focuses on the parties' intentions; a term sheet skips most of the formalities and lists deal terms in bullet-point or similar format. There is an implication that an LOI only refers to the final form. A term sheet may be a proposal, not an agreed-to document.

Within the context of venture capital financing, a term sheet typically includes conditions for financing a startup company. The key offering terms in such a term sheet include (a) amount raised, (b) price per share, (c) pre-money valuation, (d) liquidation preference, (e) voting rights, (f) anti-dilution provisions, and (g) registration rights.

It is customary to begin the negotiation of a venture investment with the circulation of a term sheet, which is a summary of the terms the proposer (the issuer, the investor, or an intermediary) is prepared to accept. The term sheet is analogous to a letter of intent, a nonbinding outline of the principal points which the stock purchase agreement and related agreements will cover in detail.

The advantage of the abbreviated term sheet format is, first, that it expedites the process. Experienced counsel immediately know generally what is meant when the term sheet specifies "one demand registration at the issuer's expense, unlimited piggybacks at the issuer's expense, weighted average antidilution"; it saves time not to have to spell out the long-form edition of those references. Second, since the term sheet does not propose to be an agreement of any sort, it is less likely that a court will find unexpected promissory content; a "letter of intent" can be a dangerous document unless it specifies very clearly, as it should, which portions are meant to be binding and which merely guide the discussion and drafting. Some portions of a term sheet can have binding effect, of course, if and to the extent an interlocutory memorialization is needed of some binding promises, that is, confidentiality of the disclosures made in the negotiation. The summary format of a term sheet, however, makes it less likely that any party will be misled into thinking that some form of enforceable agreement has been memorialized when it has not.

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