Term Sheet

Why use Heads of Terms?

The first stage in an investment transaction is often to agree heads of terms in the form of a term sheet, setting out the principal terms of the investment.

These terms will not usually be legally binding (other than in certain limited respects regarding confidentiality and potentially exclusivity) but will act as a basis for the detailed terms of the long form investment documents.  Agreeing matters at this stage will also highlight any particularly contentious areas and should save time and expense in the long run.
What other preliminary documents are used in an investment transaction?
Alongside heads of terms, the company which is the subject of the potential investment should also consider entering into a confidentiality agreement (or NDA) with the potential investor.  This will protect the confidentiality of the company’s sensitive commercial information which an investor will need access to for the investor’s due diligence and in deciding whether or not to invest.

An investor may also require an exclusivity agreement, under which the company will agree not to negotiate with another potential investor for a specified period of time.  This period will enable the investor to incur costs in its due diligence and in negotiating the investment terms and documents in the knowledge that the company is not engaged in similar discussions with another rival investor.

An investor may invest in return for either ordinary shares or preferred (preference) shares.

Alongside heads of terms, the subject company will also want to consider entering into a confidentiality agreement (or NDA) to protect the confidentiality of its sensitive commercial information which an investor will need access to for its due diligence and in deciding whether or not to invest.

An investor may also want to enter into an exclusivity agreement, under which the company will agree not to negotiate with another potential investor for a specified period of time.