Entrepreneurs at some stage are keen to bring investors (either angel investors or VC’s) on board. It comes with a lot of documentation and legal formalities. One such important document in the Term Sheet which most entrepreneurs find difficult to understand.

What is Term Sheet?

A term sheet is an agreement detailing the key deal terms and valuation of the company which the founding team and investors have reached as an agreement. The term sheet is just an informal agreement and isn’t legally bounded. It doesn’t imply any obligations for either the investor or the business to initiate the investments or the transfer of shares.

What does a Term Sheet contain?

Each business is unique and has its own requirements. It is always recommended to have a customized term sheet which suits your business model. A business is therefore recommended to consult with a Business Lawyer to draft the term sheet.

Key terms that must be included in a term sheet:

Details of money invested:  A convertible note (credit which has an option of getting converted into equity at a future date) of an equivalent amount may be created and kept as a guarantee.

Type of stock: The kind of stock allotted to the investor must be mentioned in the term sheet. The type of stock most favored by investors is preferred shares which entitles them to vote and give an upper hand in case of liquidation.

Board of Directors:  E The decision of getting someone on the board of directors must be mutually agreed and roles and responsibilities of each should be clearly mentioned.

Equity Dilution:  Early investors can have the right to buy shares at the new price, which may be lower and in priority. They can also and maintain their existing ownership by the time they want it to.  All these information must be included in the term sheet.

Tranches:  Tranches defines the stages in which the investor wants to transfer cash to the startup. The period of tranches must be clearly specified in the term sheet as it reduces both the founders and investor’s risk.

Right to buy shares back:  This ‘right of first refusal’ allows existing owners to reclaim shares that are about to be sold to a new investor. This prevents the ownership of the company. It is ideal for founding team to exercise this option and clearly mention in the term sheet to avoid confusion later on.

 

Our Business Lawyers based out of Edmonton, Alberta can help you create a term sheet for your business.

 

 

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