What Are Terms Sheets?


The terms sheet, which outlines the investment terms and conditions, is signed by the company owner or representative and the investor. When parties agree on the details of the term sheet, a legal document will be drafted that facilitates the investment in the company. Parties often use it as a starting point for more detailed and legally binding documents to follow in the future.

In general, term sheet format are associated with startups since they require more investment to start or expand their businesses, but they're also used by many companies planning mergers and acquisitions. The term sheet you have for your company increases the likelihood that investors and venture capitalists will contribute financially to its growth.

Terms Sheet Incorporation

If you're preparing a terms sheet in your business, you probably need extra funds. When you're doing really well and need some investment dollars to expand or maintain your operations at their normal pace and level, a term sheet should include the following items.

  • Sharing your information as the business owner and the investor's information will enable you to determine exactly who is included in the terms sheet.

  • If you want investors to invest in your company, you need to know how much your company is worth. It is a good idea to include the number of shares distributed and the cost associated with the distribution as part of the valuation calculation.

  • To avoid misunderstandings, be clear about how much investment you are expecting.

  • An investor who holds a 20% share of the company will own 20% of the company if the deal closes, meaning they can become a majority shareholder if the other 80% are satisfied with the deal.

  • In most cases, investors have time to review the terms sheet and make a formal decision.

  • For venture capitalists to maximize their return on investment, you may be asked to give up some of your voting rights as the business owner. You don't need to go the right or wrong way here, but if you do provide funding, you should clearly state the investor's voting rights.

  • The agreement typically includes provisions for legal fees, investor access to information, and nondisclosure obligations.

WARNINGS in Term Sheets

The process of raising capital can be confusing, especially if the investor sets up terms that are detrimental to your business.

  • The repayment schedule should not be so tough that it will cause your company to go bankrupt if your investor's money serves as a loan for your business expenditures.

  • Investors may ask for a large stake in your company, which would give them control of the whole company, if they desire to have a controlling stake.

  • An investor might ask for certain things of you, but they may also limit how much future fundraising you can do. This is something you should consider before agreeing to any terms that could limit your future fundraising.

The following terms are commonly included in term sheets

Here are a few definitions to help you understand term sheets when you're just starting out as a business owner:

  • If you're seeking investors, you're likely already familiar with what your company's value is, but you may also come across terms such as pre-money and post-money valuations. In contrast to a pre-money valuation, which is the value of the company before receiving the new investment, a post-money valuation is the value of the company after it has received the new investment.

  • The clause states that minorities will follow the lead of major shareholders when a company is sold.

  • In general, quarterly dividends are distributed by the company to its shareholders based on its profits.

  • It is possible to find pay-to-play provisions, which compel investors who do not participate in future funding rounds to do so if they do not invest pro-rata rights.

  • If you sign a no-shop agreement, you may not interact with other investors. In most cases, after signing the term sheet, you will need to wait a certain amount of time before you can start a new fundraising round. The term sheet should include an expiration date after which you are able to seek additional funding.

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