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Term Sheet

A term sheet outlines the fundamental terms and conditions of a potential investment. It's a non-binding agreement (usually) between a startup and an investor, serving as a blueprint for the final investment contract and shareholders' agreement. Here's a breakdown of what typically appears in a term sheet:

  1. Valuation: The pre-money valuation of the company, which helps determine how much equity the investor will receive.
  2. Investment Amount: The total capital the investor plans to inject into the company.
  3. Equity Stake: The percentage of the company the investor will own after the investment.
  4. Investor Rights: Special rights and protections for the investor, such as board seats, veto rights, and information rights.
  5. Liquidation Preference: Specifies how much investors get paid before common shareholders in the event of a liquidation.
  6. Anti-dilution Provisions: Measures that protect the investor’s equity stake from being diluted in future funding rounds where .
  7. Voting Rights: Details about the investor's voting power in company decisions.
  8. Employee Stock Option Plan (ESOP): Conditions of potential stock option plans and methods of providing shares to employees.
  9. Share Transfer Restrictions: Which of the following restrictions should take place: Lock-Up Period, Tag Along, Drag Along and Right of First Refusal.

A well-drafted term sheet aligns the interests of both the startup and the investor, setting the stage for a successful partnership. Startups and founders should review term sheets carefully and seek legal advice to ensure fair and beneficial terms as contradicting with Term Sheet during investment negotiations is regarded as negotiating in bad faith.

Binding Clauses in a Term Sheet

While term sheets are generally non-binding, they often contain certain provisions that are legally binding. These binding clauses ensure that specific obligations are enforceable even if the rest of the term sheet remains a preliminary agreement. Here are the key binding clauses typically found in a term sheet:

  1. Confidentiality: Requires both parties to keep the terms of the term sheet and any related discussions confidential. It prevents the disclosure of sensitive information to third parties.
  2. Exclusivity: Also known as a "no-shop" clause, this provision restricts the startup from seeking or accepting investment offers from other parties for a specified period. It gives the investor time to conduct due diligence and finalize the investment without competition.
  3. Costs and Expenses: This clause outlines which party will bear the costs associated with the transaction, such as legal and due diligence expenses. It often specifies that each party will cover its own expenses, but in some cases, the investor might cover the startup's costs up to a certain limit.
  4. Governing Law: This provision identifies the legal jurisdiction governing any disputes arising from the term sheet.
  5. Termination: This clause defines the conditions under which either party can terminate the term sheet. It might specify a termination date or outline specific events that allow for termination.