A term sheet is a document setting out the proposed terms and conditions of a business agreement. It is a non-binding document which gives a guide as to which legal documents need to be drawn up. It may cover matters such as funding, management and liquidation. It is used in investment, mergers, acquisitions and other commercial negotiations.
A term sheet provided by a venture capitalist will detail their offer to an entrepreneur. It will include matters such as the amount of funding they are prepared to give, what they require in return, eg. the number of shares or percentage ownership, decisions in which they want a say, pre-emption rights, share purchase rights, a seat on the board.
In the case of investment, a venture capitalist is likely to want a term sheet to be valid for several months. However it will be better for the entrepreneur if this can be a far shorter period, eg. two to six weeks as funding will not be made available to them until completion of the deal.
A term sheet is not usually legally binding, and will state this to be the case. It may contain some legally binding clauses, such as confidentiality or exclusivity. It is evident of serious intent to enter into negotiations and commitment.
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