7 key terms to include in a Term Sheet

What is a Term Sheet?

A term sheet is a non-binding agreement between parties that sets out the basic terms and conditions of an investment and which is usually used by startup companies when they commence their operations.

The non-binding effect of a term sheet signifies the avoidance of legal formalities that arise when a startup company is seeking investment prospects. Once parties have agreed to the terms of the term sheet, a legally binding agreement or contract is then drawn up with finer details of the agreed commercials.

Who are the parties to a Term Sheet?

The parties to a term sheet are the investors and the promoters of a company. The term sheet is prepared by the investor showing the terms of investment that he/ she is willing to make in the startup.

The 7 main key terms to include in a term sheet are:

  1. company valuation – this refers to the value of the company determined by an independent valuation;
  2. investment amount– this refers to the amount invested by an investor in a company, this amount has to be stated clearly to both parties;
  3. percentage stake– this refers to the amount of shareholding owned by a shareholder in a company;
  4. voting rights– this refers to rights derived from a specific class of shares in a company which are usually held by ordinary shareholders. They give that class of shareholders that right to vote and make decisions in the corporate sphere;
  5. liquidation preference– this refers to which investors get paid first in the instance of liquidation. Further, it states how much they will get paid;
  6. anti-dilutive provisions– this refers to clauses set out to protect investors by shielding their investment from losing value due to an increase in capital; and
  7. investor commitment– this refers to a commitment from the investor that is given to the seller of shares to purchase the shares for an agreed price.

Conclusion

Navigating around term sheets is an essential factor necessary in promoting the success of any business enterprise. It seeks to promote investor confidence.

How can we assist you?

We can advise you on ways of managing, negotiating and drafting Term Sheets in your business. Please contact us for our services at info@netsheria.com or visit our website at https://netsheria.com/ for more on our services.

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April 17, 2023|0 Comments

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