Why Need Investment Term Sheet

Posted by Enterslice India on July 12th, 2018

Investments of every sort require negotiations and meeting of minds over the terms and conditions. It is here that ‘Term Sheet’ finds importance. Term Sheet is a non-binding document that outlines the terms and conditions with respect to the investment which is mutually agreed to by the parties.

Though a term sheet does not have a legal value and cannot be enforced, yet drafting it in a detailed manner ensures that the parties are on the same page and no misunderstanding shall crop in the future. A term-sheet shall then be a reference document for the drafting of a legally binding agreement or contract.

What are the features and benefits of Term Sheet?

1. A term sheet lays the bedrock for ensuring that the parties involved in a business transaction agree on major aspects of the transaction.
2. It gives the parties ample time for better negotiations & finishing up every facet of the terms of the transaction.
3. It enables the parties to avoid the possibility of a misunderstanding between the parties at a later stage and the parties remain clear about major aspects of the deal.
4. It lessens the likelihood of unnecessary disputes.
5. A term sheet also ensures that the expenses of legal charges involved in the drafting of binding agreements or contract are not incurred from the initial stage.
6. This encourages the parties to focus on the business issues in the transaction at the early stage.
7. Investing time and resources in drawing a Term Sheet is always beneficial in the long run for the company.

What constitutes the Term Sheet?

1. A term sheet shall mention the details of the investor and the entity in which the investment is being made,
2. It shall be clear upon the mode of investment the time period if decided upon.
3. Securities,
4. Liquidation preference,
5. Conversion,
6. Voting Right,
7. Protective provisions,
8. Pre-emptive rights (to maintain proportionate ownership),
9. Co-Sale Rights,
10. Election of directors,
11. Share purchase agreement, if to be drafted between parties,
12. Option pool,
13. Sale Transaction,
14. Anti-dilution Provisions,
15. Redemption Right,
16. Representations and Warranties,
17. Conditions to Closing,
18. Management and Information Rights,
19. Right to Participate Pro Rata in Future Rounds,
20. Matters Requiring Investor Director Approval,
21. Non-Competition and Non-Solicitation Agreements: Non-Disclosure,
22. Employee Stock Options,
23. Provisions of right of first refusal/co-sale etc.

These are some terms that may be mentioned in the investment term sheet but all should be as per individual transaction, the nature of the transaction as well as particular requirements of the parties.

What note of the Term Sheet must be taken by the parties involved?

Since a Term Sheet lays groundwork for the future formation of legally binding agreements, all the settled terms, clauses and provisions must be analyzed, discussed and negotiated thoroughly with all the aspects including that of future impact kept in mind.

It is advised that during negotiations and drawing up of the Term Sheet, a team of professionals must be consulted. It not only provides an experienced outlook to the transaction but also a fresh and unbiased approach which enables an unambiguous and exhaustive document to be made.   

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