TERM SHEET
A time period sheet can be defined as a initial agreement that outlines the fundamental phrases for making an investment without being legally binding. It serves as a blueprint for creating more comprehensive documents that hold legal weight. Once both parties have reached a consensus on the specifics outlined in the term sheet, a formal agreement or contract will be drafted to align with the agreed-upon details.
WHY IS A TERM SHEET IMPORTANT?
Time period sheets are important and can be complex; however, they ought not to be overly complicated. It is effortless and uncomplicated to comprehend a document if you seek legal counsel prior to signing it. The three sections a term sheet covers are Funding: Corporate governance. Liquidation: The term sheet holds significance for both investors and founders prior to engaging in any merger or seeking funds.
KEY FEATURES OF A NON-BINDING TERM SHEET
In India, a non-binding term sheet is commonly employed in the initial stages of negotiation to establish the general terms of a potential agreement, such as a business partnership, investment, or acquisition. This document is intended to convey an intention rather than being a legally binding contract.
Non-binding term sheets play a crucial role in facilitating negotiations between parties by highlighting the main points of agreement and disagreement without obligating either party to commit to final terms. While the term sheet itself is not legally enforceable, it frequently includes positive binding clauses that cope with confidentiality, exclusivity, and dispute decision methods to guard the events’ hobbies during the negotiation method.
The main benefit of a non-binding term sheet is its adaptability, enabling parties to explore potential collaboration without incurring substantial legal risks or expenses before investing significant time and resources into due diligence and contract creation. That is the extra commonplace form of time period sheet in India. It functions as a guide for discussions, specifying crucial aspects of the agreement without legal binding power. Both parties have the freedom to terminate or modify the terms of a contract before it becomes legally binding. Nonetheless, positive provisions within a non-binding term sheet can keep legal weight.
These typically include:
- Secrecy: Safeguards private data shared during discussions.
- Non-Solicitation: Prohibits either party from attempting to obtain business from the other’s clients or customers during the negotiation period.
- Exclusivity: Restricts the parties’ capacity to engage in other negotiations for a designated period.
- Governing Regulation and Jurisdiction: Outlines the legalframework and courts that willmanage any conflicts that could arise from the time period sheet’s binding provisions.
TERM SHEET CHECKLIST
The specific details included in a term sheet will differ based on the type of deal being negotiated. For example, an angel investment term sheet will vary greatly from a Series B and above transaction round. Nevertheless, there are several recurring components that are often found in investment-related term sheets:
|
Type of Security |
It is crucial to identify the type of security, such as equity, debt, derivatives, or hybrid securities, that will be provided to the other party in a transaction. |
|
Capital Structure |
The capital structure section of the term sheet outlines the company’s paid-up capital, share capital, which includes the face value of equity, preference shares, and other relevant details. It also provides information about the company’s shareholding pattern as of the effective date of the term sheet. |
|
Valuation |
This clause refers to the valuation of the company before the investment or financing, with the intention of the proposed transaction. |
|
Investment Amount |
The investment amount this clause specifies is the proposed sum to be invested in the company, along with the post-investment shareholding structure. |
|
Stake Percentage |
Stake percentage: This indicates the portion of ownership the investor will acquire in the company in return for their financial contribution. |
|
Conversion Rights |
This clause allows shareholders to convert their preferred shares into equity, granting them specific rights. |
|
Anti-Dilution Protection |
Anti-dilution protection This right safeguards the investor from a decrease in equity value resulting from future stock issuances if the stock is sold at a lower price than the initial investment. |
|
Board Composition |
This clause refers to the composition of board members right after the deal is closed, where the investor may have the right to nominate directors. |
|
Transfer Restrictions |
This clause imposes any condition or restriction on the shareholder’s ability to sell or transfer these securities, safeguarding the interests of the investors. |
|
Conditions Precedent |
This clause outlines the conditions or obligations that the obligated party must fulfill before a specific date, as agreed upon, to ensure the implementation of the term sheet. |
|
Pre-emptive Rights |
Preemptive rights This clause gives investors the opportunity to participate in future fundraises, with the first option to buy before the public offering or any other circumstances. |
|
Confidentiality |
This clause requires both parties to keep the term sheet, its terms, negotiations, and any other confidential information private. |
|
Anti-dilution |
These clauses safeguard investors from their ownership stake being diminished if the company introduces new shares at a lower value in subsequent funding rounds. |
|
Voting Rights |
Voting rights The term sheet may specify the voting rights that come with the investor’s ownership stake. This can be a topic of discussion, especially for startups where venture capitalists might request more influence in decision-making processes. |
|
Liquidation Preference |
The liquidation preference provision outlines the distribution of proceeds from the sale of the company or its assets among shareholders in the event of a liquidation event. |
|
Governing Law and Jurisdiction |
The governing law and jurisdiction clause would establish the jurisdiction that would apply to the term sheet, as it may be negotiated between companies operating under the laws of two distinct jurisdictions. |
TERM SHEET FORMAT
STARTUP TERM SHEET
Few crucial conditions to hold in thoughts for a begin-up term sheet:
- Non-binding
- Valuation of the company
- Amount of investment
- Percentage stake
- Anti-dilutive provisions
- Clarifying voting rights
- Describe the liquidationpreference
- Investor commitment
A time period sheet used as a part of a merger or attempted takeover will commonly comprise records approximately the preliminary provide of the acquisition rate and desired technique of charge, in addition to the homes protected in the transaction. it can additionally contain facts about what if anything is excluded from the agreement or any matters that both or each events may regard as necessities.
BENEFITS OF TERM SHEET
It is utilized as part of a merger or attempted acquisition, which typically includes details about the initial purchase price offer, preferred payment method, and the assets that are being acquired.
Key elements such as the identification of the events involved, information about all of the belongings, valuation, desired bills, and the initial purchase price which include any contingencies that may effect that charge, are all part of a term sheet.
When engaging with investors like angels or venture capital firms, the term sheet will be provided after presenting during a meeting with the partners. This will be the time when all the partners of the firm gather in a conference room to have the founder present her pitch deck. If the presentation addresses all concerns, a term sheet is then presented to the founder.
WHY eStartIndia?
eStartIndia is a single-window solution for entrepreneurs, startups, and businesses looking for legal, financial, and regulatory compliance and regulatory compliance assistance. Its mission is to make the complicated world of legal documents and regulatory compliance easier to navigate. eStartIndia amalgamates technical legal expertise with tech-enabled solutions to empower people and companies all over India.
One of the most significant strengths of eStartIndia is that it is affordable and transparent in its pricing, enabling legal and professional services to become available even to small businesses and early-stage startups. The platform provides end-to-end support with services including company registration, GST filing, trademark registration, agreement drafting, and others—all assisted by expert professionals.
Furthermore, eStartIndia is client-oriented. The team provides timely delivery of services, customized counseling, and ongoing support at each phase of business setup. For students and professionals of law, it also provides useful learning and internship experiences to fill the knowledge gap between the theoretical study of law and practical legal practice.
No matter whether you are an entrepreneur with a fresh idea or an existing business looking to expand, eStartIndia offers a trusted and effective legal ally to assist you at each step of your path—digitally, cost-effectively, and professionally.
In short, eStartIndia makes business easy, so you can focus on growing.
