Funding

How to Prepare a Term Sheet: A Step-By-Step Guide

This manual will introduce you to some possible ways of making organising these vital documents much more comfortable.

How to Prepare a Term Sheet: A Step-By-Step Guide
Debite
15 June 2022

You possibly have already heard something about the term sheets as a startup entrepreneur. It is a critical interaction between a startup owner like you and your potential financiers. Irrespective of where you sit at the desk, it’s essential to spell out all of the asset’s terms & conditions before making any commitment.

We know this crucial function of a term sheet; understanding the process is necessary for your investment and business goals. So we compiled the following short, albeit informative and introductory guide that will undoubtedly facilitate your preparation of a term sheet for your business.

Starting from a brief explanation of what a term sheet is, this step-by-step manual will introduce you to some possible ways of making organising these vital documents much more comfortable.

What Is a Term Sheet Exactly?

You can imagine the term sheet as a deal between the founder and the investors of the startup. It’s comparable to a pact between you two, except it’s typically non-binding. However, when acknowledged in the term sheet, the covenant becomes “legally binding” to a certain extent. For example, this is when founders are prohibited from making further decisions on specific subjects. Logically, this brief definition needs further detailing of a term sheet’s components to comprehend the concept better.

What Is in a Term Sheet?

Unsurprisingly, one of the questions people wonder about is the contents of a term sheet. Although it is hard to put exact borders on these substances, we can argue that a well-structured term sheet example is mostly between 15 to 25 pages in length. Moreover, it should clearly and understandingly explain the essential details regarding conditions and regulations between the investor and the startup (or business) owner (in this case, that’s you) so as not to have any problems regarding these first substantial steps later on.

What are these details? The target company and its starting value and the investors involved in the process constitute the backbone of the essential details of a term sheet. Other than these, the list of contents of a term sheet can be expanded to cover the following.

  • Common shares
  • Other significant financial perspectives of the investment
  • Post-money value of the company/startup
  • Liquidation preference
  • Confidentiality agreement

Interestingly, many people also want to understand the legal binding of a term sheet; therefore, we believe it is equally essential to talk a bit about this particular perspective.

How Much “Legally Binding” Is a Term Sheet?

A fundamental legal approach argues that whilst term sheets are not legally enforceable most of the time, save in the cases of secrecy, exclusivity (if applicable), expenses, and jurisdiction, they demonstrate the parties’ purpose. As a result, it may be difficult for both parties to renew once a term sheet has been agreed upon. Even though renegotiation is conceivable, you could be compelled to give up another contract item that is equally vital to you.

Transitional deals may have a consequence on the parties’ relationship, which may mean that the agreement never moves on from this point. To put it more simply, the ramifications of agreeing to a non-binding commercial point early in the process of a prospective deal may be more catastrophic than you imagine. Therefore, we can say that these are what it contains rather than what it is that makes a term sheet have a position of being “legally binding,” at least to a certain extent within a specific context.

All of these critical details make people think about whether there can be someone that can help them on the path of preparing a term sheet. Here is a brief explanation regarding such potential people.

Who Can Help You with Preparing a Term Sheet?

Term sheets contain some of the most critical commitments about your business or startup initiative. However, there might be times when you will look for help from outside to avoid any possible costly mistakes.

As noted above, especially when there are cases connected to legal matters, asking for the help of a law professional might be beneficial. Under such circumstances having lawyers for startups is a good option. Furthermore, to avoid any misunderstanding between the parties of a term sheet, you can have these lawyers who will protect the lawful rights of the startup as well. Other than this “humanised” option, several legal SaaS companies can make this process much easier for you. Also, this is where we, Debite, come into the picture to support the costs of your legal needs whilst preparing your term sheet.

Using Legal SaaS Tools Whilst Preparing a Term Sheet

It might also be a good option for you to use specialised software, known as Legal SaaS (or SaaS Legal), whilst dealing with the term sheet preparation. Two of the leaders in the field are Seedlegals and Orrick. Again, you can take advantage of the capital Debite provides.

Whilst reading their respective SaaS Legal Documents, including SaaS Legal Agreements and SaaS Software License Agreements, you should be careful to ensure what you can do with them.

SeedLegals

SeedLegals offers tools and solutions for investor and creator parties of a term sheet. Analysing the specific needs of these two groups, SeedLegals software makes the process much easier and comfortable and more trackable for anyone involved in it.

Orrick

Orrick’s Term Sheet Creator lets you produce drafts of startup and venture finance contracts based on your answers to a series of interactive questions, from business formation to preferred stock financing. Among the tools Orrick offers, Incorporation Term Sheet, Convertible Note Financing Term Sheet, and Preferred Stock Financing Term Sheet appear to be the most intriguing.

Lastly, don’t forget to check the opportunities Debite provides to you in this process. Paying for these software and many more is now much more accessible and beneficial, thanks to Debite’s financing options. In less than 24 hours, you can secure your loan from Debite and utilise additional benefits, including available savings and the opportunity of lowering your expenses up to 30% by selecting annual subscription offers. After explaining these tools and their potential, now a brief rewind for the overall process of preparing a Term Paper looks pretty tempting.

Fastly: Steps of Preparing a Term Sheet

Generally speaking, preparing a Term Paper is much easier than you might expect. There are just a few crucial steps to which you should pay the highest possible attention, and the rest of the process will come upon you much faster.

Identify the Purpose of the Term Sheet Agreements

Your defying the objective of the term sheet should not be confined to the model designed above; it should also include gathering any information required to succeed phases in the term sheet development.

Briefly Summarise the Terms and Conditions 

The summary may go into greater depth, referring to unique components depending on the nature of the term sheet, including the document’s objective and the kind of investment/sale engaged.

List the Offering Terms

This text chapter generally aims to solve the so-called “offerings on the table.” However, it is just another part of a term sheet that delves into considerable depth about the fundamental tenets of the conversation.

Include Dividends, Liquidation Preference, and Provisions

For example, let’s imagine your business runs into some difficulties early on and utterly fails. Investors would receive a portion of their money back if these settings were in place. Those are essentially the rights in place in terms of provisions, if things do not go as planned and the business and the investors’ money are jeopardised. Safeguarding measures are put in place in the term sheet in this instance, and they should cover what will be refunded to investors if the business’s market falls.

Identify the Participation Rights

The participation rights chapter of a term sheet is mostly a section where both parties have difficulty when it comes to striking a deal. It is primarily attributable to the fact that investors frequently favour participation rights for apparent reasons, whilst entrepreneurs do not.

Create a Board of Directors

A company’s board of directors is an essential governing body, and term sheets typically include provisions outlining how it will be organised and who will influence crucial board votes. The board of directors is, in many respects, argued to be one of the most fundamental methods of control of a typical VC-backed enterprise.

End with the Voting Agreement and Other Matters

Never forget to leave an alternative path that can be taken to reach a challenging situation between the parties of a term sheet. Clarifying what can be done in such instances will help you avoid a stalemate, in which many jurisprudential and stressful steps will have to be taken.

Final Words

Preparation of a term sheet includes many essential phrases, which sometimes even evolve into jurisprudential means. Successful planning of a startup (or business) will definitely have significant implications coming from such a process. Understanding what can be done and from whom you can get an extra hand dealing with these steps will make this operation much more comfortable for both parties of a term sheet. Debite gives you a great opportunity through which you will be able to attract even a significant number of investors to your startup. You can illustrate your efficient usage of the Debite credit as another vital proof of your company being investable. This is your story, and Debite will continue to offer many possible ways to make it much easier for you.

Discover a better way to manage spend