What is a term sheet?

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If you are a business owner, entrepreneur, or an investor you are likely to have heard of a term sheet at some point, but do you know what they are actually used for?

Term sheets are used to lay out the key commercial and legal terms of a proposed transaction, however, they are not usually legally binding. They are more of a proposal and evidence of the intent of the parties involved.

Whilst agreeing to a non-binding transaction may not seem overly serious, it can cause issues. Once anything is agreed in term sheet and that term sheet has been signed, it can be difficult to renegotiate the term laid out in the document. Renegotiation could lead to compromise on either side and could further impact the relationship between the parties involved. The complicated nature of term sheets is why it is advised that you seek legal advice before signing the document.

What should a term sheet include?

A term sheet ultimately allows all involved to have a full check over commercial issues early on in a transaction. It gives a chance for any issues to be resolved and for negotiations to be fully outlined before being used as a framework for any further documents that may be legally binding. Because of their importance, there are some crucial elements that a term sheet should include.

  • Details about the company including its current shareholders and directors
  • Details about the current value of the company, how much investors hold percentage wise and details about how much money the company wishes to raise
  • Details on how any investment will be spent
  • Information on the rights held by all parties
  • A summary of what may happen if a company is sold or goes in to administration

The amount of detail included within a term sheet depends on the person drafting it, but there should be a good balance of crucial information that is explained well, without having a document that will take too long to delay the process. When drafting a term sheet, you should also decide beforehand whether the document will be legally binding or not. You could opt for a document that is partially binding if you need something that is in the middle.

For further advice on drafting a term sheet, contact a specialist lawyer who will be able to offer help and expertise.