Meaning
Document outlining the primary conditions of a business deal. A term sheet is a non-binding agreement that lays out the key points of an investment, such as the valuation, the amount of money being raised and the rights of the new investors. It serves as a blueprint for the final legal documents.
This document is the starting point for the final stage of a fundraising round.
Proposal Outline
Summary of the deal allows both sides to agree on the big picture before spending money on lawyers. When a term sheet is signed, it usually includes a period of exclusivity where the founders cannot talk to other investors. This provides the time needed for the investor to complete their due diligence.
The outline covers everything from board seats to liquidation preferences.
Negotiation Frame
Discussion of these points is where the real power dynamic of the deal is revealed. A term sheet forces the founders to make hard choices about control and future dilution. Because it is a summary, it highlights the most contentious issues early in the process.
Reaching an agreement here is the most difficult part of the investment cycle.
Binding Intent
While most clauses are not legally enforceable, a few, such as confidentiality, often are. The signing of a term sheet shows a serious commitment from both parties to close the deal. It is a major milestone that signals the transition from pitching to closing.
Once signed, the path to the final investment is usually clear.
