The term sheet – the first sticking point between startups and investors
At the latest with the discussions on the term sheet, things start to get serious in the corporate financing process – the foundations for joint cooperation in the coming years are agreed upon. The wishes of the founders and the requirements of the investors often differ. Regardless of whether there are binding or non-binding regulations, a term sheet sets the framework for further contract negotiations and at the same time minimizes the risk of a (costly) termination of the contract. In order to conduct the discussions successfully, it is important, on the one hand, to know exactly what the individual points mean and, on the other hand, how the willingness to compromise can be explored.
Dominik von Wissel
wissel@buse.de
Buse Rechtsanwälte Steuerberater Partnerschaftsgesellschaft mbB
What is a term sheet
A term sheet is a non-binding agreement that sets out the basic terms of a proposed transaction between two parties. Typically it is used in the context of a corporate financing transaction, such as a venture capital investment or corporate debt financing, but can also be used in any type of negotiation where there is an exchange of value. The term sheet serves as a template for generating a more detailed and binding legal agreement that contains all the necessary terms of the transaction. The term sheet typically contains important provisions such as the amount of money to be invested, the ownership interest to be acquired, the rights and privileges of investors, and the timing of the transaction. Although the term sheet is non-binding, it is still a legally binding document in the sense that it sets out the parties’ intention to enter into a transaction. This is important because it creates a clear understanding of the terms of the contract between the parties, which can help avoid later misunderstandings or disputes. The term sheet is also an important tool for negotiating the final terms of the contract. If both sides have a clear understanding of the key provisions in advance, they can focus on negotiating the details that are most important to them. This can help save time and avoid potential disagreements later. Overall, the term sheet is a crucial tool in any business negotiation that involves an exchange of values. It helps determine the parties’ intentions, outlines the key terms of the contract, and serves as a template for negotiating the final agreement.
The Benefits of using a Term Sheet
A term sheet is a document that sets out the key terms and conditions of a planned investment. It is used to summarize the key points of an agreement between an investor and a company seeking financing. The term sheet is non-binding, meaning the parties are not legally obligated to agree to the terms set out in the document. However, it serves as a blueprint for negotiating a final investment agreement. Using a term sheet can have a number of benefits for both investors and companies. For companies, it can provide much-needed clarity on the key terms and conditions of an investment. This clarity can help avoid misunderstandings and disagreements during the negotiation process. Additionally, a company can use a term sheet to gauge an investor’s interest in a proposed investment. For investors, it can serve as a valuable screening tool. By reviewing a company’s term sheet, an investor can quickly assess whether the investment is right for them. Additionally, it can help ensure that an investor’s interests are protected during the negotiation process. Overall, the use of a term sheet can help pave the way to a successful investment. By clarifying key contract terms, it can help avoid misunderstandings and disagreements. Additionally, a term sheet can help ensure that an investor’s interests are protected.
Negotiation of a term sheet
Negotiating the terms of a term sheet can be a complex and time-consuming process. The negotiation process should be conducted calmly and professionally. The following tips will help you negotiate the terms:
1. Understand the terms of the term sheet.
2. Be prepared to negotiate the terms of the term sheet.
3. Focus on the key terms and conditions of the investment.
4. Be flexible in your negotiating position.
5. Be prepared to compromise on some terms of the term sheet.
6. Keep a cool head during the negotiation process.
What should be included in a term sheet
The term sheet should contain a description of the transaction, the parties involved, key terms and all other important information. It should be clear and concise and not contain any legal jargon.
Some of the most important terms that should be included in a term sheet are:
– The buying price
– The payment plan
– The interest rate
– The submission date
– The guarantees and representations
– The alliances
– The compensation provisions
– The choice of law and place of jurisdiction
The term sheet should also state whether the transaction is an asset purchase or a stock purchase. In an asset purchase, the buyer acquires the company’s assets; in a stock purchase, the buyer acquires the company’s shares.
The essential contractual terms of a term sheet are non-binding, meaning that the parties are not obliged to complete the transaction. However, the term sheet is usually followed by a more detailed and binding agreement, such as a purchase agreement.
