What Is a Term Sheet?

Usually, the negotiation of a venture investment begins with the circulation of a document known as a "term sheet". The term sheet is a summary of the terms the investor is prepared to accept. A term sheet is a nonbinding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail, analogous to a letter of intent. The advantage of the abbreviated term sheet format is that it expedites the process. Also, since the term sheet is not an agreement, it is less likely for a court to find unexpected promissory content; a "letter of intent" can be a dangerous document unless it specifies very clearly which portions are binding and which only guide the discussion and drafting. Some portions of a term sheet can have binding effect, of course, if and to the extent an interlocutory memorialization is needed of some binding promises, that is, confidentiality of the disclosures made in the negotiation. The format of a term sheet, however, makes it less likely that any party will be misled into thinking that some form of enforceable agreement has been memorialized when it has not.

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