What is a Term Sheet
A term sheet is a document summarizing the agreed terms and conditions in a proposed investment transaction. It outlines the key elements of the transaction and aids in drafting comprehensive legal documents.
Legal Effect
Term sheets are typically non-binding and may be contingent on satisfactory due diligence or negotiation of further conditions. However, clauses like exclusivity periods and confidentiality are legally binding.
Term Sheet Provisions
The contents of a term sheet can vary depending on the type and stage of investment. The clauses are generally categorized into funding, corporate governance, and exit provisions.
- Funding
Funding provisions detail the investment, including investor and company information, total funds, and securities issued (e.g., common shares or preference shares). Share price and the number of shares are also included. - Corporate Governance
These terms cover voting rights, board composition, and information rights. Voting rights outline investor participation in corporate decisions, board composition specifies director nomination arrangements, and information rights define the company’s disclosure obligations to investors. - Other Provisions
Additional provisions may include:- Pre-emptive Rights: The right of existing shareholders to purchase shares before a proposed sale, transfer, or disposal.
- Tag-Along Rights: The right of minority shareholders to sell their shares under the same proportional conditions.