Term Sheets
TERM SHEET DEFINED
According to Wikipedia (my favorite source), ‘a term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. After a Term Sheet has been “executed”, it guides legal counsel in the preparation of a proposed “final agreement”. It then guides, but is not necessarily binding, as the signatories negotiate, usually with legal counsel, the final terms of their agreement.
Term sheets are very similar to “letters of intent” (LOI) in that they are both preliminary, mostly non-binding documents meant to record two or more parties’ intentions to enter into a future agreement based on specified (but incomplete or preliminary) terms. The difference between the two is slight and mostly a matter of style: an LOI is typically written in letter form and focuses on the parties intentions; a term sheet skips most of the formalities and lists deal terms in bullet point or similar format. There is an implication that an LOI only refers to the final form. A term sheet may be a proposal, not an agreed-to document.’
GREAT SOURCES FOR TERM SHEET INFORMATION
Brad Feld, managing director at Mobius Venture Capital, has one of the best series of posts on terms sheets. Topics covered include: Price, Liquidation Preference, Board of Directors, Protective Provisions, Drag Along, Anti-Dilution, Pay-to-Play, Dividends, Redemption Rights, Conversion, Conditions Precedent to Financing, Vesting, Information Rights, Registration Rights, Right of First Refusal, Voting Rights, Employee Pool, Restriction on Sales, Proprietary Information and Inventions Agreement, Co-Sale Agreement, Founders Activities, Initial Public Offering Shares Purchase, No Shop Agreement (also Unilateral or Serial Monogamy), Indemnification, and Assignment.
WHAT YOUR LAWYER WILL SAY
Turns out your lawyer (assuming you are working with a ‘venture friendly’ firm) will suggest that you accept a ‘market’ or ’standard’ set of terms. According to Nivi, ‘Most law firms do a lot more business with VCs than they are likely to do with you. VCs refer new clients to the law firms, hire the law firms regularly, and know the attorneys socially. Where do you think the law firms’ loyalty lies?’ He is right. In every transaction I have been involved with the VCs prefer that you work with a firm they ‘know’. Don’t worry, they will pick another firm to work with ~ you are going to pay their legal bills anyway…
