term sheets and investment terms

Term sheets are non-binding agreements that set out at a general level the terms and conditions of an equity or debt investment in a company.  Term sheets are generally 10-15 pages in length.  Equity term sheets are significantly different from debt term sheets.  We will provide more details for each type of term sheet below.

Equity Term Sheets

Generally, an investment firm will provide a company with a term sheet that provides the terms, or requirements, for raising cash from the investment firm.  There are many elements to a term sheet but the term sheet can be simplified into two areas for negotiation:

  • Valuation--this is the part of the term sheet that specifies the proposed valuation of the company into which the investment firm will invest money.  The valuation will determine the ultimate equity ownership of the investment firm and the dilution of previous shareholders in the company.
  • Control--the majority of the term sheet will discuss various mechanisms, provisions, and terms that allow for the investor to control the company or control the process of when, how often, and how much the investor is repaid. 

Valuation

Valuation is complicated enough that we have dedicated a complete page to the topic.  In brief, valuation is a negotiated outcome where the buyer of equity, the investor, and the seller of equity, the company, determine the value of that equity.  Just as you can tell the value of an entire publicly traded company by multiplying the stock price of the company by the total number of shares (stock) outstanding, you can find the value of an entire private company by doing the same thing.  So when the buyer buys equity at a certain price, this price will automatically provide and implied value for the entire company.  Investors obviously usually prfer a lower price and the company usually prefers a higher price.

Control

There are a large number of control provisions in a typical equity term sheet.   We have provided more details below on each item.  For convenience, we have also grouped the items into categories by the legal documents that reference each topic.

Debt Term Sheets

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