Importance of Term Sheet

You must be wondering, why term sheet is important? In fact what is a term sheet?

The term sheet is the document that outlines the terms by which an investor (Angel Investor or Venture Capital Investor also known as VC) will make a financial investment in your company. Term sheets tend to consist of three sections: funding, corporate governance and liquidation. 

As described by Alejandro Cremades in his book The Art of Startup Fundraising, term sheets can be really scary for new start-up founders. More than anything, it’s the fear of the unknown, or of making a mistake that founders may regret later, as the business grows. Term sheets are important, and can be complex, but they don’t necessarily have to be, in fact it a term sheet can be a simple and easy to understand document. The key is knowing what to expect, knowing what you want out of a term sheet, knowing what you won’t bend to, and of course having good representation to review all of the fine print.

When dealing with investors such as Angels or even Venture Capital firms the term sheet will be provided after presenting during a partners meeting. This will be the time when all the partners of the firm get together in a conference room in order to have the founder present her pitch deck. If the presentation satisfies all concerns then a term sheet is presented to the founder.

Term sheets can vary depending on what type of funding round you are in, and how much is at stake, as well as who is involved. Generally term sheets for seed rounds are going to be much lighter and shorter than for series A or beyond. The less at stake, the less complex it should be, as no one wants to unnecessarily splurge on extra legal fees, or burning time. The process can be significantly simplified when using a third-party funding portal.

In a seed round, the investor will typically be the one providing the term sheet. This may change, especially when there are multiple investors in later and larger rounds.

Different between LOI and Term Sheet

Letters of intent and term sheets are very similar. Both documents outline an agreement that two or more parties expect to make. A letter of intent, as the name implies, is written in the form of a letter whereas a term sheet is more often a list of the important parts of the anticipated contract or agreement.

While the terms of the business arrangement are not legally binding, the term sheet is the chief document used by legal counsel to prepare the final agreement and to resolve any disputes that may arise in negotiation. If you are raising funds or in process of raising funds, then don’t hesitate to consult us for the term sheet. You may click on this link for getting it drafted: Term Sheet Drafting.

Also see: Pitch Deck Template by Peter Thiel