Raising capital for a company is one of the critical moments in its development. Before signing a full investment agreement, it is customary to sign a Term Sheet – a document of principles that summarizes the main terms of the investment in a concise and clear way. Although it is a non-binding document in most clauses, the Term Sheet is the foundation upon which the final agreements will be based, and therefore it is important to understand it well and draft it correctly.
What Does a Term Sheet Include?
A standard Term Sheet includes several essential clauses:
the investment amount, the company’s valuation before and after the investment (Pre-Money and Post-Money Valuation), the type of shares to be allocated to investors (usually preferred shares), special rights for investors such as veto rights, rights to participate in future funding rounds (Pro-Rata Rights), anti-dilution protections, information and board rights, and a No-Shop period during which the company is prohibited from raising funds from other parties.
Why Is It Important for the Term Sheet to Be Balanced?
While it may be tempting to quickly agree to any condition just to close the investment, a Term Sheet that is too burdensome on the company can harm it in the future: locking in overly rigid terms may make future fundraising difficult, drive away new investors, or limit the founders’ managerial freedom. Therefore, it is important to build a Term Sheet that anchors and balances the interests of the investors, the shareholders, and the company.
Need Help Drafting a Term Sheet? We're Here for You
The Term Sheet is much more than a document of principles: it is the stage at which the foundations for the company’s future success are laid.
At Danoy, we specialize in supporting startups and technology companies through capital raising processes, and we would be happy to help you draft the principles for a smart, professional, and balanced Term Sheet – one that serves your growth and your goals.