Business is an endless flow of different documents, which have different levels of importance and degree of confidentiality. One way or another, any owner or superior employee should have an idea about each of them and know how a particular document is made, what it includes, and why it is needed. In this article, we will talk about what is a term sheet in business.
What is a term sheet?
A term sheet is an agreement, but it is not a binding agreement. It is an agreement between the owner of the company, or his representative, and the investor, which includes a broader list of investment terms. Typically, this document is used as a template and basis by which to further document the legal obligations of the two parties during the transaction. And if both parties are happy with the details of these terms and conditions, then the entire process can move on to the next stage of forming the agreement and legal documents that help facilitate the passage of the investment.
Most often the list of conditions is found in the documentation of startups because in most cases it is the start-up business that needs investment. The existence of a list of conditions gives companies an advantage, which attracts more investors and creditors because investors want to invest in a company that is more likely to bring them profit. And if the terms and conditions sheet is properly laid out, it prevents any questions or confusion.
What terms and conditions should the term sheet include?
A properly completed terms and conditions sheet will help you get funding faster and start working on expanding your operations and ideas. Below we will guide what to include on the terms and conditions sheet:
- Identification information – you should include information about the company as the owner and investor information to determine exactly which parties are on the condition sheet
- Evaluation – business valuation will show investors the real value of your company in the market, this is very useful information for investors because their desire to invest in the organization depends on it. In this valuation calculation, you can also include information about the shares already distributed and their price
- Investment amount -this amount should also be exact so that there are no unfulfilled expectations in the future
- Interest rate – this refers to the percentage of your company that the investor will own after investing. Depending on the amount of interest, the investor may become a major shareholder in your company
- Deadline – set a deadline by which the investor can review the contents of the document and make their decision
- Voting rights – sometimes there is a practice where business owners reduce their voting rights so that venture capitalists can increase their potential return on investment as much as possible. So, in the term sheet, you must specify when investors will have voting rights
What to watch out for when drafting a term sheet?
The investment process is always complicated, your investor may impose conditions far from in your favor, here’s what you should watch out for:
- Unfair financing – if you want to use a portion of the investment to cover expenses, you should pay attention to the note information and make sure it does not lead you to bankruptcy
- Higher controlling interest -some investors may be tempted to take too much equity in your business
- Restrictions – Some suggestions of restrictions by an investor may be extremely disadvantageous to your business, such as asking you to reduce your fundraising