Investment term sheet template

In an investment transaction, a term sheet is a short, structured document that outlines the key commercial and legal terms of a proposed investment. It’s usually agreed early in the investment process by the company, its shareholders and the investor.

The term sheet sets out the principal terms of the deal before moving to legally binding contracts, such as the investment agreement and shareholders’ agreement.

The initial stage in an investment transaction, including early stage and venture capital investment transactions, is often for the company, its existing shareholders and the investor to agree a term sheet, outlining the key terms of the investment.

While these terms are typically not legally binding (aside from specific areas such as confidentiality and possibly exclusivity), they serve as the basis for the detailed terms in the investment agreement and other long form investment documents.  Agreeing matters at this stage helps identify particularly contentious issues and should save time and expense in the long run.

Most of the term sheet is non-binding, meaning it records the parties’ intentions but isn’t legally enforceable. However, some terms may be binding – such as confidentiality clauses or an exclusivity period, where the company agrees not to negotiate with other investors for a period of time.

Binding clauses give reassurance while the investor carries out its due diligence and detailed contracts are being prepared.

A term sheet will typically set out a timetable  – for example, 30 to 60 days  – to allow time for due diligence and for the formal legal documents to be negotiated. During this period, the parties will be expected to work towards completing the investment on the agreed non-binding terms.

Vesting is a mechanism sometimes included in a term sheet to ensure that founder shares are earned over time or linked to continued involvement in the business. This protects investors by discouraging founders from leaving the company shortly after investment while still keeping all their shares.

After the term sheet is signed, the investor will usually carry out due diligence and the parties will move on to negotiate the full legal documents – such as the investment agreement, shareholders agreement and new articles of association. These documents will turn the agreed term sheet into legally binding contracts.