Venture Capital Term Sheets
A Term Sheet outlines key financial data and terms by a venture capital firm to a private company. It is a preliminary and conditional agreement. Those key terms are the basis for investment documents that follow. Except for certain clauses (e.g., confidentiality, exclusivity, costs and break-up fees), Term Sheets are not intended to be legally binding. They are negotiable and usually contain certain conditions which need to be met before the investment is completed, known as conditions precedent. The Subscription Agreement contains details of the investment round, including the number and class of shares subscribed for, payment terms, representation of shareholders and warranties about the condition of the private company and its key assets. These representations and warranties will usually be qualified by a disclosure letter and supporting documents that specifically point out any issues that the founders believe the investors should know prior to the completion of the investment.
The Shareholders’ Agreement will usually contain investor protection clauses; including consent rights, rights to board representation and non-compete restrictions. The Constitution will include the rights attached to the various share classes, the procedures for issuance, transfer rights of shareholders and board meeting procedures. Once agreed upon by all parties, lawyers use the Term Sheet as a basis for drafting the investment documents. The more detailed the Term Sheet, the fewer the commercial issues that will need to be agreed upon during the drafting process. Once the provisions of the Term Sheet have been negotiated and agreed upon, a Subscription and Shareholder’s Agreement is drafted that outlines the provisions in a legally-binding document.