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WHAT IS A TERM SHEET

A term sheet is a non-binding document drafted to express the intent of the founders and investors prior to the creation of the actual legally binding contract. Term sheets provide a point of reference upon which the parties can begin and perfect their negation before finalizing a contract. It is sometimes referred to as a memorandum of understanding or letter of intent. Term Sheets usually present the terms, conditions and other areas for negotiation in an outline or bullet point format as opposed to the paragraph format of contracts and agreements.

WHEN DO YOU NEED A TERM SHEET?

A term sheet is needed when the parties intend to enter into negotiation of au upcoming and or proposed transaction. The term sheet allows the parties to home in on the important aspects of the proposed transaction.  They are very useful for startup company investments. The term sheet provides a means of addressing and resolving issues that may become problematic at a later step in the transaction. It should be used to set a timetable for negation and finalization of the transaction.

The term sheet is useful in outlining the conditions and process of the transaction before a formal legal binding contract is drafted. In essence, the term sheet lays the groundwork for negotiation prior to the creation of the actual agreement/contract between the parties.

WHAT SHOULD BE INCLUDED IN A TERM SHEET?

A term sheet contains the following:

  • Company information including shareholder and director information.
  • Information rights for and of investors.
  • The current assessed value of the company.
  • The expected amount that needs to be obtained by the company.
  • If applicable the rights of investors and founders to remain as directors of the company.
  • A statement as to the use of the invested funds.
  • A detailed discussion of the “reserved rights” of investors vis a vis major company decisions.
  •  A statement of founders’ restrictions in regard to company activities.
  • A statement explaining the process of dissolution and or what happens upon the sale of the company.
  • A synopsis of share issuance and transfer rights.

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