Glossary term
Term Sheet
A term sheet is a summary of key deal terms used before parties move into final legal documents.
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What Is a Term Sheet?
A term sheet is a summary of key deal terms used before parties move into final legal documents. It often appears in startup financing, private equity deals, acquisitions, loans, joint ventures, and other negotiated transactions.
Some term sheets are mostly nonbinding, while certain provisions may be binding. The exact legal effect depends on the document and applicable law, so parties should not assume the phrase “term sheet” makes every section informal.
Key Takeaways
- A term sheet outlines the main terms of a proposed transaction.
- It is usually used before final contracts are drafted.
- Some provisions may be nonbinding, while others may be binding.
- Important terms can include price, valuation, ownership, control, closing conditions, fees, confidentiality, and exclusivity.
- A term sheet can shape the economics of a deal long before final documents are signed.
How a Term Sheet Works
Parties use a term sheet to make sure they agree on the major business points before spending time and money on definitive agreements. In a financing round, the term sheet may cover valuation, investment amount, liquidation preference, board rights, voting rights, anti-dilution terms, and closing conditions.
In a sale or acquisition, it may outline purchase price, structure, payment timing, due diligence, representations, indemnities, and exclusivity.
Common Term Sheet Sections
Section | What it may address |
|---|---|
Economics | Price, valuation, investment amount, return terms |
Control | Voting rights, board seats, consent rights |
Process | Due diligence, closing conditions, timing |
Protection | Confidentiality, exclusivity, expense reimbursement |
Exit | Sale rights, redemption rights, transfer restrictions |
Why Term Sheets Matter
A term sheet can look short and simple while carrying major economic consequences. A founder may focus on headline valuation while missing control rights. A buyer may focus on price while missing indemnity or closing conditions. An investor may focus on ownership while missing liquidation preferences.
The practical rule is to read the term sheet like the deal already matters, because it does.
The Bottom Line
A term sheet summarizes the key terms of a proposed deal before final contracts. It can be an efficient planning document, but it should be reviewed carefully because the important economics and control terms often start there.