What Is a Term Sheet?
Usually, the negotiation of a venture investment begins
with the circulation of a document known as a "term
sheet". The term sheet is a summary of the terms
the investor is prepared to accept. A term sheet is a
nonbinding outline of the principal points which the Stock
Purchase Agreement and related agreements will cover in
detail, analogous to a letter of intent. The advantage
of the abbreviated term sheet format is that it expedites
the process. Also, since the term sheet is not an agreement,
it is less likely for a court to find unexpected promissory
content; a "letter of intent" can be a dangerous
document unless it specifies very clearly which portions
are binding and which only guide the discussion and drafting.
Some portions of a term sheet can have binding effect,
of course, if and to the extent an interlocutory memorialization
is needed of some binding promises, that is, confidentiality
of the disclosures made in the negotiation. The format
of a term sheet, however, makes it less likely that any
party will be misled into thinking that some form of enforceable
agreement has been memorialized when it has not.
VC Experts, Inc.
