Term sheet: how to write and what to look for

Petro Krasnomovets
5th January |
term-sheet

Cooperation between the investor and the company can be fruitful and long-lasting if the primary conditions are observed. One of them is drafting a term sheet — a letter with a list of terms of cooperation. This document describes all the nuances: the rights and obligations of both parties. Of course, creating a term sheet is not an easy process. It is necessary to prepare for it and follow the rules of document preparation. 

What must be specified in the term sheet, in what sequence should be stated, and how to ensure no errors in the agreement? We have prepared step-by-step instructions on writing a term sheet regulating the main processes during cooperation between an investor and a company.

What is a term sheet: features and sphere of influence

First, we need to understand what is a term sheet. This is a contract with a detailed list of the terms of the agreement concluded between the investor and the company owner. Such a document is considered the first step for further business financing. It should demonstrate all the advantages of investing resources in a specific company and describe the strategy for its further development and financial benefit for the investor.

A term sheet is often used during company reformation: the conclusion of merger or takeover agreements. A term sheet is a fully legal document that can be used during court hearings. It allows for regulating disputed points during direct cooperation. After the agreement, the contract is signed by both parties and becomes legally binding.

Why draw up a contract between the investor and the company?

Primarily, the term sheet is needed to regulate all aspects of the interaction between the investor and the company. A detailed description will avoid disputes in further work and create comfortable conditions and an understanding of the requirements of both parties.

A term sheet is mandatory for startups. Creating a table of the company’s advantages allows investors to be interested even at the initial stage of business creation.

What is the subject of the term sheet?

The term sheet does not have a universal form — each company prescribes the document based on its specifics. However, a few items can be called the most common topics of discussion in the term sheet, including:

  • terms of cooperation: mandatory and optional;
  • assessment of the company is carried out by qualified assessors;
  • loan terms and amounts;
  • loan extension conditions;
  • the number of dividends and the periodicity of their payment;
  • terms of payment in case of sale or liquidation of the business;
  • interest rate and collateral.

How to make a term sheet correctly?

Now let’s take a closer look at how to make a term sheet to avoid common mistakes. Companies often involve experienced lawyers in creating a document with an agreement or using special services. This is necessary for the paper to have transparent and fair terms that suit both parties and are aimed at the benefit of both the investor and the company.

We have prepared some essential advice that will allow you to make a term sheet that would suit everyone.

Define the basic terms of cooperation

It is better to start the document with a short summary of the main interaction conditions between the investor and the company. Write them down in a separate list that you can quickly familiarize yourself with. Of course, these are far from all aspects. However, such a summary shows the main direction of cooperation, sets the tone for further conversation, and clarifies to what extent both sides of the contract are “on the same wavelength.”

Next, you need to define all the details in the document:

  • all legal parties to the agreement;
  • terms of cooperation, indicating which of them are mandatory and which are not;
  • time frame determines the period the contract will be valid;
  • a business plan for the development of your company. It is essential to write down a business promotion strategy, draw up a table with costs and potential profits, and describe several possible scenarios.

The term sheet should be created for interest in your company. That is, you need to present all the points in such a way that they attract investors and encourage them to finance your company. Specify the most important, but avoid overloading the document with unnecessary details. You can see ready-made examples.

Write the terms of payment

When an investor pays attention to a company where he invests his funds, he should see what result he can get. And the result has more to do with incomings. Therefore, the task of the company owner is to interest the investor by specifying all payment terms in detail. Clarify all dividends, and select their category: 

  • non-cumulative;
  • cumulative

Write down how the protection of investors’ financial assets is guaranteed, what will happen in case of liquidation of the company, etc. The more detailed this item is, the better the investor will understand how financially attractive such cooperation will be for him.

Add the ability to make changes to the document

When creating a term sheet, both sides of the agreement should be involved. This is how it is possible to reach a compromise and create comfortable conditions for implementation. Think about how to draft the document so both parties can get acquainted with it in advance and add their comments and edits. This is possible, for example, using the Google Doc form, if you give access to the file to everyone directly related.

It is scarce to think through all the points that would satisfy both the company and the investor the first time. The document is often edited several times and only after a mutual agreement is signed and considered valid.

Online access to the file allows not only one of the parties to make changes to the document. It is also an excellent opportunity for the other party to see exactly where the changes have been made and understand which points need further discussion.

By following all these recommendations, you will be able to think of a term sheet that would regulate all aspects of the interaction between the investor and the company, would contain the rights and obligations of both parties, and would allow you to handle controversial issues that may arise in the process of cooperation.