Term Sheet

A contract is an agreement between two parties, a concept that seems simple enough. Yet contracts come in all shapes and sizes, and run the gamut from spoken oral promises all the way to documents so extensive and cumbersome that they resemble a textbook. The prevalence of the latter kind is the result of the complexity of most modern-day transactions. Given the financial, legal and regulatory landscape that most startups must face, there are endless items to address, each of which must have a place in a final agreement. Of course, startups don’t always have the time or the money to pay attorneys to draft long contracts at the start of business negotiations. As a result, startups may turn to term sheets as a first step in defining the relationship between two parties.

Term sheets are typically viewed as non-binding documents used in anticipation of a formalized, full-length financing agreements. That said, term sheets are still legal documents, and depending upon their wording and the manner in which they are executed such documents may very well be binding in court. The typical venture financing term sheet has a few provisions that are binding — confidentiality and a no-shop.

It is important to run a draft term sheet by an attorney prior to execution or signing of the document, bearing in mind that simply because you don’t consider it to be binding does not mean that it isn’t. In fact, more often than not term sheets are drafted by lawyers.

The material terms of the venture financing are set forth in the term sheet, such as pre-money valuation, amount to be raised, type and terms of security to be received and other contract rights expected. The term sheet will serve as the guide and foundation for the definitive financing agreements.

Here is a link to the open source term sheet posted on the NVCA website.