A term sheet is a non-binding agreement between two parties who are about to commence a transaction or investment. The term sheet lays the foundation for the proposed agreement but the actual details are all subject to negotiation. The term sheet essentially acts as a precursor to a legal contract.
Term sheets are generally used when a) selling or purchasing a business, b) selling or purchasing share, b) raising investment.
Terms in a term sheet?
Capitalization and valuation
Liquidation or exit preference
Obligations of the Promoter.
Time limit to execute a definitive agreement.
Note of Due diligence and cost related to the entire transaction.
Notice and Termination.
There can be many other items which may also be included but these are some of the common ones.
Once the items in the term sheet are laid out, negotiations can begin. Commonly, items such as valuation, exit rights, pre-emptive rights and so on are negotiated thoroughly. When the sheet is created, it is usually very short and can even be in a bullet-point format which means that there is plenty of room for interpretation. This why the negotiation that happens is very thorough. It only covers the most important elements in a very general way.
Once the term sheet is negotiated and agreements are reached, the sheet can then be converted into a contract.
Once the terms are finalized, the Term sheet will be signed by the Investor and Promoters.
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