The Importance of Term Sheet

Nimit Ramaiya

11/6/20231 min read

Yes, raising funds for your business can be daunting and the first significant step often involves encountering a Term Sheet.

A term sheet is a brief, non-binding document that summarizes the key terms and conditions of an investment or business deal between the investor and a company seeking investment. Term sheet is not a legally binding agreement, but serves several important purposes and is a critical initial step in the investment process.

Once you receive a term sheet from an investor, here are the steps you should consider taking:
↔ Carefully review the term sheet to understand the key terms and conditions proposed by the investor. Pay close attention to the valuation, equity ownership, investment structure, and any special rights or preferences of the investor.

↔ Engage legal counsel with expertise in investment agreements and venture capital. An experienced attorney can help you navigate the terms, provide guidance, and negotiate on your behalf.

↔ Negotiation: If there are terms in the term sheet that are not acceptable to you or need clarification, discuss these with the investor and negotiate changes or amendments to the term sheet.

↔ Be prepared for due diligence: The investor will conduct thorough due diligence to verify your company's financials, legal status, and other critical aspects. Keep your documents up to date.

↔ Once the terms are agreed upon, work with your attorney to draft the formal legal documents, including the investment agreement, shareholder agreements, and other required contracts. Ensure that your company complies with all legal and regulatory requirements. Ensure that all parties are in agreement and comfortable with the terms.

Successful negotiations are the building blocks for a fruitful partnership. Feel confident to negotiate terms you find unfavorable, and aim for a win-win agreement.

woman signing on white printer paper beside woman about to touch the documents
woman signing on white printer paper beside woman about to touch the documents