Business transactions, especially ones where investments are to be made, require all types of documentation and paperwork. Many of these are fluid documents — meaning things on them will be changed during the course of negotiations. One of these important documents is a term sheet, which both parties require during the business dealing.
What Is a Term Sheet?
Simply put, a term sheet is a document used in business transactions that outlines the terms and conditions of the business deal, hence its name. In most instances, it is used in some sort of financial transaction, such as an investment or a merger and acquisition (M&A). However, the term sheet itself is not a binding contract — it generally serves as a template that lists the basic terms and conditions of a deal, which will be used in the more complex, legal documents.
A term sheet is only one of the scores of documents used in a financial-transaction situation. In some instances, it’s referred to as a “letter of intent” or “memorandum of understanding,” but in most cases, the name “term sheet” (or sometimes “terms sheet”) is the standard nomenclature.
A Few Particulars To Know
There are a few important things to know about term sheets and how they fit into the big picture. These include:
- It is nonbinding document.
- It is most commonly used in start-ups.
- Important information, such as valuation, investment figures, percentage stake, voting rights and other important terms and conditions, should be clearly stated on it.
Also, you should understand that the complexity of a term sheet is parallel to the complexity of the transaction: Term sheets can consist of one page or dozens.
Why Are Term Sheets Important and When Are They Used?
In virtually every transaction that requires a term sheet, the document will be available to all parties during every phase of the deal. Term sheets are almost always used in the investment phase of a start-up or during a sale or M&A. They’re used by both the company looking for investment and the investors. In most cases, they stick to the facts, usually in bullet-point form.
What Kind of Information Is on a Term Sheet?
While a standard term sheet is full of useful and important information, it doesn’t have to delve into every nook and cranny of the company involved. What it should contain is the points that an investor would need to know to proceed with the transaction. Some of the most important points in a term sheet include:
- Identification of parties involved.
- Amount of money that will be invested.
- Quantity and types of shares to be acquired.
- Company valuation.
- Voting rights and board seats gained by the investors.
- Future investment stipulations.
- Timetable for negotiation.
Of course, these are simply a few of the major points. Depending on the particulars of the specific deal, there may be many more points that need to be covered on the term sheet.
Keeping Confidential Information Safe
Needless to say, the information contained on a term sheet (as well as the other documents involved in the transaction) is highly sensitive and requires extremely tight security. Therefore, a secure method for sharing, distributing, reviewing and editing documents is vital. The best way to maintain this level of security is to use a virtual data room (VDR), a secure online location for document storage and distribution commonly used in financial transactions such as M&As, investments and IPOs. In most instances, a VDR is used during the due-diligence phase of a merger or acquisition.
Where Does Caplinked Come Into Play?
Having a trusted VDR partner for all aspects of any transactions, including those that involve term sheets, is a vital factor for success. Caplinked offers VDRs with cutting-edge features necessary to maintain strict security but give approved users access to some (or all) of the required documents. Caplinked offers VDRs with high-level admin controls, document and version management, multiple layers of security and 24/7 customer support. Contact us today to learn more about a VDR solution that will fit your organization’s needs. Or start your two-week free trial now!
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer-products industries.
Sources
Contracts Counsel – https://www.contractscounsel.com/t/us/terms-sheet
The Startup Law Blog – https://thestartuplawblog.com/term-sheets-binding-non-binding/
