A term sheet is a typically non-binding agreement that outlines the basic terms and conditions on which an investment will be made. It serves as a template to develop more detailed legally binding documents which are needed to effectuate the transaction.
The material terms generally included in a Term Sheet can be divided into three categories:
Terms that address investor protection
Terms that impact control over decision making, and
Terms that impact valuation and economic division of profits and proceeds upon a liquidity event.
Besides this, it will also typically include the amount of investment, the nature of investment instrument and the rights and preferences of the investor’s shares.
But term-sheets can be overwhelming for startup founders as they contain a lot of complex legal commercial terms. If not understood properly before execution can lead to founders agreeing to such terms and conditions that may not be in the best interest of the startup.
To understand how each clause of term-sheets means and works, download and read the below article.