What Is a Term Sheet?

by Craig Anthony

1 min read

A term sheet is a written agreement that an investor and entrepreneur write up to define the basic terms of an investment. Term sheets are not legally binding and are just summaries of what can be expected from both parties in the agreement. Once the investor and entrepreneur agree to the terms in the term sheet, a legally binding contract is written and signed by everyone involved. Term sheets are usually short documents, but they cover a lot of topics. Every investor and investment firm is different, so their term sheets vary, but typically, a few areas are always covered in the document. The amount of money being offered, and what percentage of the company, is described, as well as the broad strokes of the deal. Whether the investment is for equity, debt, or a combination is laid out. Any conditions the investor demands be met before the funding occurs are also detailed. Usually, there is research that needs to be done on the company and this is where the investors detail that information. Also included is the expected date when the investment will occur. Other important topics that may be covered include option details, rights of each side of the deal, and confidentiality details. Term sheets are a very important part of the investment process for the investor and entrepreneur since they describe the general characteristics of the investment and how to close the deal. Without term sheets, the structure of the investment deal would be too subjective, which might cause problems later. Entrepreneurs should be wary of an investor seeking to make a deal without first providing term sheets.

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