Know Various Aspects Related To The Term Sheet

1. What is a Term Sheet?

A term sheet is a nonbinding agreement that shows the basic terms and conditions of an investment. The term sheet serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is drawn up.

2. Term Sheet in the Indian Context 

A term sheet may likewise be referred as a letter of intent, an MOU i.e. memorandum of understanding. The first round of speculation from a financial investor is known as a term sheet. Every round of investment has its own terms & conditions and these terms define a business seeking outside capital funding. The label isn't imperative, and regarding their structure and drafting they set out the key business and legitimate terms in regard to a proposed transaction.

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3. Is the Term Sheet legally binding in India?

One of the fundamental aspects in every corporate transaction is ascertaining whether the term sheet is intended to be binding or non-binding. Below we discuss the various facets of binding nature of term sheets, from a drafting perspective as well as enforceability perspective.
a.    Drafting Perspective  
i)    Non-binding Term Sheet: While this is the most common position in term sheets, calling this document 'non-binding' term sheet is a misnomer as actually it is a partially binding term sheet. There indeed is express language to indicate that the term sheet would not be binding between parties, as there would be detailed definitive documents in the future. At the same time, typically an exception would be created for clauses like Exclusivity, Confidentiality, Term and Termination, Governing Law and Dispute Resolution, and the like, which would remain binding between the parties.
ii)    Binding Term Sheet: As is self-explanatory, a binding term sheet implies all clauses and provisions therein would be binding between the parties. From an enforceability perspective, it has more teeth. Therefore, any definitive documents in the future should clearly have provisions that override this document.
iii)    Unilaterally Binding Term Sheet: This is an interesting practice that we sometimes observe, where the term sheet is drafted as a hybrid of the above two models. In other words, for one party it would be non-binding (with the exception of clauses cited above), while for the other party all obligations and commitments would be binding. This is normally done to a party that is perceived to be one that could significantly try to alter principles agreed in the term sheet during negotiations of definitive documents, or for start-ups where at term sheet stage the investor/acquirer does not have sufficient visibility of the facts.

4. What does a Term Sheet include?

Company valuations, investment amounts, the percentage of stakes, and anti-dilutive provisions should be spelled out clearly.
Voting rights. Startups seeking funding are usually at the mercy of VCs who want to maximize their investment return. This can result in the investor asking for and obtaining a disproportionate influence on the company's direction.
Liquidation preference. The term sheet should state how the proceeds of a sale will be distributed between the entrepreneur and the investors.
Investor commitment. The term sheet should state how long the investor is required to remain vested.

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5. What is the purpose of a Term Sheet?

All term sheets contain information on the assets, initial purchase price including any contingencies that may affect the price, a timeframe for a response, and other salient information.
Term sheets are most often associated with startups. Entrepreneurs find this document crucial for investors, often venture capitalists (VC), who may offer capital to fund startups. 

6. Who prepares the Term Sheet?

A term sheet may be prepared by either party – the investor or the founder. Usually, if a venture capital firm is investing, the VC offers a term sheet.

7. Is a Term Sheet legally binding?

Generally, term sheets are non- binding in nature, but they can become legally binding if executed on a stamp paper. The provision for its nature being non-binding can be inserted in the term sheet itself. Parties should be careful while drafting these documents at the negotiation stage.

8. Why are the terms important if they are non-binding?

While terms in a term sheet may be non-binding, they still represent the conditions of an agreement that both parties have agreed in-principle, like a handshake deal. If the due-diligence progresses well, these are the terms according to which a binding stock purchase agreement will be prepared.

9. How do you negotiate a term sheet?

Following are the ways to negotiate a term sheet: 
Get more than one VC interested
Understand common market terms
Watch out for red flags
Understanding valuation and dilution is critical
Consult with experts for advice

10. Are term sheets enforceable?

Generally, term sheets are non- binding in nature, but they can become legally binding if executed on a stamp paper. The provision for its nature being non-binding can be inserted in the term sheet itself. Parties should be careful while drafting these documents at the negotiation stage.

11. What is a term sheet in M & A?

A term sheet is a mostly non-binding document signed by the target and the prospective buyer that describes the major terms of the proposed acquisition. While most term sheets are non-binding, they often contain binding provisions regarding non-solicitation, exclusivity and confidentiality.

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