Thursday, January 5, 2023

The Role of the Term Sheet in Raising Venture Capital

The Role of the Term Sheet in Raising Venture Capital


The Role of the Term Sheet in Raising Venture Capital


Entrepreneurs and companies seeking venture capital often negotiate with one or more venture capital firms on a number of important issues. These topics include the amount of capital to be raised, investment terms, etc. The document that summarizes these terms is known as a "term sheet."

The term sheet is similar to a letter of intent, that is, it is a non-binding summary of the key points of the transaction. These points are covered later in detail in the Stock Purchase Agreement and related agreements signed at the time of execution of the transaction.

The value of the abbreviated term sheet format is that it speeds up the process of completing a transaction. Specifically, it allows the parties to agree on the general terms of the transaction rather than having to discuss less important details. Also, because it is non-binding, it allows the parties to take their discussions to the next level without the danger of becoming overly committed. Please note, however, that some parts of a term sheet may be binding. Binding aspects generally only deal with issues of confidentiality and disclosure.

Venture capital firms, and not firms seeking capital, typically prepare the term sheet to include the terms under which they are willing to invest their capital. Alternatively, when seeking capital from angel investors, companies typically create their own term sheets for angels to review. This fact says a bit about the balance of power in an investment transaction. Venture capital firms are often more sophisticated and powerful than firms seeking capital. Alternatively, angel investors are often less sophisticated and powerful, and more likely to consider the investment terms set forth by the company seeking capital.

Reaching a term sheet is a key milestone in the capital raising process. Although not all term sheets result in a transaction, the term sheet shows that both parties are legitimately interested in executing a transaction. It is then up to the investor and the company to agree on the details.