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Term Sheet: How to Write and What to Look for

76% of the term sheets include investor privileges in case of liquidation. In 95% of cases, the investor receives the right to appoint its own director. 29% of term sheets have a fee for providing investments. Data provided by UK PwC's VC Term Sheet Market Report 2021 confirms just how many pitfalls the document conceals. If you don't know how such conditions will affect the business, this article is for you. Stalirov&Co's IT lawyers explain and break down the individual clauses of the letter of intent to prepare the company for negotiations and avoid unpleasant surprises. 


What is a term sheet and why is it needed?

The term sheet is the key terms of the future contract or other deal, the first legal step to funding. It is also called a memorandum of intent and is mistakenly thought that it is not necessary to comply with the agreements and they do not create any commitment.Of course, the terms of the deal may change, but the confidentiality, exclusivity clauses and due diligence are mandatory at the time of signing. So the document should not be considered as a formality.

For instance,  the Delaware case. It is a popular state to register IT companies. A pharmaceutical firm, SIGA, needed money to develop an antiviral drug. The founders then borrowed money from PharmAthene and in return they agreed to a Term Sheet that they would grant a license. SIGA took the money, but later changed its mind about signing the license. The court ruled that SIGA acted in bad faith in this case and had to indemnify PharmAthene for damages.

Add to the Term Sheet a clause on the right of the start-up and the investor to be compensated for lost profits if the deal falls through the fault of one of them. Such a provision would make the document more enforceable and allow for recovery of the lost income. However, the amount of the lost profit should be justified. For example, a quotation from the other investor must be submitted to the court.


IT companies will need Term sheet for such deals

  • Private equity and Venture capital

For fund raising from PE firms, PE funds, business angels, venture capital funds and individual investors.

  • M&A

To formalize an agreement on corporate structuring: a merger or acquisition of a company.

  • To fix the partnership agreements

Here's an example. Fintech blockchain company cooperates with a bank to enable customers to make payments in cryptocurrency. The parties sign a Term Sheet to formalize the arrangements. The document should include the next clauses:

  1. The digital assets which the bank supports: BTC, ETH, USDC, UST, LUNA and others.
  2. The functions of the bank. For example, the function of internal transfers, deposits and withdrawals in the deposit wallet.
  3. The functions of the partner company: software provision, marketing and customer support.
  4. The terms of due diligence.
  5. Fees payable for the provision of the bank's services: asset management fees, transaction fees and authentication fees.
  6. The payment of VAT. It is important to specify that the VAT is included in the amount of payments.
  7. Confidentiality.
  8. The term of the agreement and dispute resolution procedure.


The Term Sheet is not just for investors and buyers of businesses or parts of businesses. The document also facilitates formalizing the agreements for cooperation, as with Fintech companies and the banks.


Tips for Writing a Term Sheet agreement

Here is a guide for those who have to write a document. We will tell you what clauses are required and important to include. 

The deal price and the structure of the investment rounds

Fix the amount of the deal and the rounds of payments. For example, a company raises a $5 million investment. Then the tranche can consist of 3 rounds: 

  1. Advance payment - $100,000.
  2. Payment in 10 days after signing Shareholders agreement (SHA) - $2.4 million.
  3. Payment in 3 months after signing of the SHA - $2.5 million.


Also determine the status of the advance in case the deal does not go through. For example, the advance is treated as a convertible note. In this case, the investor finances the development of the IT start-up on debt. If the business achieves a certain economic performance, or receives further rounds of investment, the debt will be converted into shares of the company. If it fails to take off, the loan is repaid with interest.


In the Term sheet, add a pre- and post-tranche valuation of the company. Pre-money valuation is a value of the company before the investment. Post-money valuation is a pre-money valuation + raised amount.  The amount of funding divided by the post-money valuation determines the percentage of funders' and investors' shares. For example, the pre-investment value of the company is $5 million, and the business also raises $5 million of investment. Then the valuation of the company after funding is $10 million. The investors receive the rights to ½ of the capital, and another ½ remains for the founders.


The calculations become more complicated with an employee stock ownership plan (ESOP). It is introduced to attract, motivate and retain professionals. If the pool is implemented on a post-investment basis, there is a share dilution of both founders and investors. Back to our example. The pre-investment value of the company is $5 million and the post-investment value is $10 million. The founder and the investor each hold ½ of the capital. If they decide to issue stock options, they will each own 42.5% of the company and the remaining 15% is an incentive pool. The share in stock options will proportionally reduce both the funder's and the investor's share.  But more often, investors demand that the pool be counted in the pre-investment valuation so that their share will not be diluted by the pool. Thus, the investors would get 50% of the company, the ESOP would get 15%, and the founders would get the remaining 35%.

The Term Sheet defines the conditions for the possible dilution of the share of founders and investors. In addition, the parties may agree to issue stock options to employees.


The purpose of the funds

Outline the purpose of raising investment by stages, iterations. For example, for production start-up, product development, sales, marketing, operational and legal costs. Define the timeline for completion of the project phases. For example, production start-up within 6 months after receiving advance payment.


Ownership structure after the deal

Fix each member's shareholding and the number of shares. Define a purchase script in case the company issues new shares.

The Term sheet clause can be worded as follows: each shareholder has the right to purchase an issuing share equal to his shareholding in the company's shares. If the shareholder refuses, the shares can be bought by other shareholders on a proportional basis.

It turns out that if a shareholder has a stake of 20%, then if 100 shares are issued, he can buy 20 shares.


Board of Directors

In the section you should answer the following questions.

  • How many members does the board of directors consist of?
  • How are they appointed?
  • How voting occurs and how are decisions taken: by an absolute majority or unanimously. You can draw up a list of issues that can only be decided unanimously. Among them are questions about issuing stock options, paying dividends and structuring the business.

According to Mountside Ventures statistics, 80% of investors expect to have a board seat, which means this question is important to discuss and fix at the stage of signing the Term Sheet.


A start-up can fail because of a trivial reason: the lack of a management structure and division of responsibility. It is advisable to fix the functions in the business already at the negotiation stage. For example, one funder is responsible for customer acquisition, sales, and marketing, and the other for software development. In the Term sheet stage, the basis of the future board is created.


Confidentiality  and non-competition

Limit the ability of investors to disclose trade secrets and create competing products before the investment agreement is signed.

The right thing is to sign an NDA before starting negotiations and approving the Term sheet. In 2021, Netflix launched The Billion Dollar Code series. It is the story of two geniuses, Carsten and Juri, who invented Terra Vision, software for virtual reproduction of the world using satellite imagery. However, Google stole the idea, and created a similar IT solution - Google Earth. The product now generates $700 million a year for Google. Carsten and Juri disclosed the work and showed the prototype to a Google representative in order to raise the investment, but they never got it. Along with the investment, they lost the opportunity to make millions. All because they failed to sign an NDA. 

The Netflix story is based on a real-life court case. Every startup that omits such formalities like NDA and NCA can then find them in the same situation. Your task is to implement a secure information mode before the start of negotiations without fear of losing technology rights and competitive advantage, as happened with Terra Vision.


Closing date of the deal and investment rounds

Define the date by which the parties have to sign the SHA. The majority of funds (50%) take 8-12 weeks to perform due diligence and agree equity documents. Fix project stages and deadlines. This could be a detailed road map of the corporate development strategy, project launch and product promotion stages.


Dispute resolution

It is advisable to decide in advance which country's court will consider the dispute. Usually parties select one of the following arbitration institutions for dispute resolution: 

  • International Chamber of Commerce (ICC),
  • Revised International Center for Dispute Resolution (ICDR)
  • The London Court of International Arbitration (LCIA)
  • The Singapore International Arbitration Centre (SIAC) 

Term Sheet should be comprehensible and concise. Leave the details to the SHA. The purpose of the Term Sheet is to agree on the key terms.


What to watch out for when you sign the Term sheet from an investor?

Imagine that you have founded a start-up, analyzed the market, assembled a team, made an MVP and perhaps commenced earnings. However, in order to grow, you need money for marketing, team extension and product development. You went to a business angel. He gave credence to a project and agreed to give you money. You have a Term Sheet in front of you. You see it for the first time. Here's how to avoid being trapped with a document that was not developed by you, and therefore not in your interest.


In addition to valuation, conversion and option pool, investors use special clauses to limit losses and guarantee returns. Here are examples of such clauses


Liquidation Preference

PwC in VC Term Sheet Market Report 2021 stated that 76% of Term Sheets include downside protection.  The clause defines who and how much money will get first in the event of liquidation, bankruptcy or sale. This is standard practice, but businesses need to be prepared for it. Company bears the risks, which has issued preference shares to the investor. For example, an investor invests $500,000 in preference shares in a company with a 2x liquidation rate. Now if the company is sold for $2,000,000, the investor will receive $1,000,000 (2x $500,000). This leaves other shareholders with only $500,000 on sale, even though the start-up is being sold for $2,000,000. 


Dilution Protection 

A company cannot sell shares below the price paid by the first investor.  46% of Term Sheets include provisions that allow adjustment of the investor's stake if the investment is raised on a lower price.


Right of first refusal 

The investor will be able to maintain their ownership level during future funding rounds and participate proportionally in future share issues.

Let's say that in the first round of funding, the company sold 10 out of 100 shares to investor with the right of first refusal. If an additional 500 shares are issued, the investor will have the right to buy back 50 shares (at the same price) before the others. The danger is that in future rounds you may find investors who only want to enter the company if they can buy a significant amount of capital. But you will not be able to offer such terms to the investor because of the right of first refusal.



Both the investors and buyers need time to assess the potential of a business before making a decision. 79% of Term Sheets specify  an exclusive period. On average, between 30 to 60 days. During this time, the company agrees not to solicit other investors or consider other offers. The bad thing about the clause is that it does not allow you to look for better terms. If you agree to an exclusivity clause, limit the period.


Don't look at all for the catch. Investors can offer favorable and interesting terms. In 2019, Runet discussed the Term Sheet for buying startups from Atlassian. The company was offering to pay the option recipients for the value of shares that the startup had promised on vesting. The clause is sure to make employees happy.


The Term Sheet is the foundation for a future deal and an opportunity to agree upon fair and transparent terms. You will not be able to get financing from the US and EU without signing the instrument. In addition, discussing terms and conditions is a good way to assess the partner's and investor's intentions and attitude. 




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