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What we'll cover
What is a Term Sheet?
A Term Sheet is a non-binding agreement that sets out the terms and conditions under which an investor will invest in a business. Term Sheets are usually used by business founders and startups. They outline the basics of the investment deal and guide the preparation of the final agreement.
When should I use a Term Sheet?
Use this Term Sheet:
- if you are a private limited company (LTD) looking for seed investment in return for ordinary shares, or
- if you are looking to make a seed investment in an LTD in return for ordinary shares
Sample Term Sheet
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TERM SHEET
SUMMARY OF TERMS FOR SALE OF SERIES SEED SHARES
| Company | , a company registered in under number and whose registered office is , . |
|---|---|
| Founders | |
| Investors | (the "Lead Investor") in conjunction with other investors (the "Investors") mutually agreeable to the Lead Investor and the Company. |
| Structure of Financing | The financing will be up to an aggregate of £ at a fully diluted pre-money valuation of £ . The Lead Investor will invest up to £ and would hold no less than % of the Company on a fully diluted basis. |
| Conditions to Close | (i) completion of confirmatory due diligence and anti-money laundering checks (ii) all employees having entered into service agreements containing IP assignment provisions (iii) receipt of all necessary consents and (iv) incorporation or re-incorporation in . |
| Estimated Closing Date | |
| Type of Security | Ordinary Shares . |
| Important Decisions | |
| Pre-emption | All shareholders will have a pro rata right, but not an obligation, based on their ownership of issued capital, to participate in subsequent financings of the Company (subject to customary exceptions). Any shares not subscribed for may be reallocated among the other shareholders. The Investors may assign this right to another member of their fund group. |
| Right of First Refusal and Co-Sale | The Investors shall have a pro rata right, but not an obligation, based on their ownership of Ordinary Shares, to participate on identical terms in transfers of any shares of the Company, and a right of first refusal on such transfers (subject to customary permitted transfers, including transfers by Investors to affiliated funds). Any shares not subscribed for by the Investors would then be offered to the other holders of Ordinary Shares. |
| Drag Along | In the event that the holders of a majority of the Ordinary Shares wish to accept an offer to sell all of their shares to a third party, or enter into a Change of Control event of the Company, then subject to the approval of the Lead Investor and the Board, all other shareholders shall be required to sell their shares or to consent to the transaction on the same terms and conditions. |
| Restrictive Covenants and Founders Undertakings | Each Founder will enter into a non-competition and non-solicitation agreement, and an employment agreement in a form reasonably acceptable to the Investors, and shall agree to devote their entire business time and attention to the Company and to not undertake additional activities without the consent of the Investors. A breach of any of the foregoing restrictive covenants or undertakings by a Founder shall result in immediate dismissal for cause of such Founder. |
| Founder Shares | Shares held by the Founders will be subject to reverse vesting provisions over years as follows: 25% to vest 1 year after Closing and the remaining 75% to vest in equal monthly instalments over the next following years. If a Founder leaves the Company voluntarily or is dismissed for cause, they shall offer for sale to the Company (with a secondary purchase option for the holders of Seed Shares) any unvested shares at the lower of nominal value or subscription price. |
| Board of Directors | The board of directors of the Company (the "Board") shall consist of a maximum of three members: the holders of Ordinary Shares other than the Lead Investor may appoint two directors and the Lead Investor may appoint one director. |
| Information | The Lead Investor shall receive weekly reporting and monthly financial information. |
| Documentation and Warranties | Definitive agreements shall be drafted by counsel to the Lead Investor and shall include customary covenants, representations and warranties of the Company (which shall be liable up to a maximum of the investment amount) reflecting the provisions set forth herein and other provisions typical to venture capital transactions. The Founders will also complete a personal questionnaire. |
| Expenses | |
| Exclusivity | In consideration of the Lead Investor committing time and expense to put in place this financing, the Company and Founders agree not to discuss, negotiate or accept any proposals regarding the sale or other disposition of debt or equity securities, or a sale of material assets of the Company for days from the date of the Company's signature below. |
| Confidentiality | The Company and Founders agree to treat this term sheet confidentially and will not distribute or disclose its existence or contents outside the Company without the consent of the Lead Investor, except as required to its shareholders and professional advisors. |
| Non-binding Effect | This Summary of Terms is not intended to be legally binding, with the exception of this paragraph and the paragraphs entitled Expenses, Exclusivity and Confidentiality, which are binding upon the parties hereto and shall be governed and construed in accordance with the laws of England and Wales. |
Acknowledged and agreed:
LEAD INVESTOR
FOUNDERS
| Signed: | |
|---|---|
| Date: |
APPENDIX A
CAPITALISATION TABLE
About Term Sheets
Learn more about making your Term Sheet
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How to make a Term Sheet
Making a Term Sheet online is simple. Just answer a few questions and Rocket Lawyer will build your document for you. When you have all of the details prepared in advance, making your document is a quick and easy process.
To make your Term Sheet you will need the following information:
Investee company and founder details
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What are the details of the investee company (ie the company raising funds)? This includes its name, address and registered number.
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What are the details of the founder(s) of the investee (eg their names and numbers of shares held)?
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What is the value of the investee company?
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Is a percentage of the investee company held in an employee share option plan (ESOP)?
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If so, what number of shares are contained in the ESOP?
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Is the investee company seeking to qualify for tax relief under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS)?
Lead investor details
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What are the lead investor’s details (eg their legal structure, name and address)?
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If the lead investor is a company, partnership or LLP, who will sign on its behalf?
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How many shares in the investee company is the lead investor due to receive?
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How much is the lead investor investing in the investee company?
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Will the lead investor appoint a non-voting observer to attend board meetings?
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Will the lead investor have management rights? If so, when is the management rights letter sent?
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Will the lead investor be entitled to priority payment on exit?
Additional investor details
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Are there any additional investors to this funding deal? If so:
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What are their details (eg their legal structure, name and address)?
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Vesting
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Over how many years will founder shares be subject to reverse vesting?
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Will any unvested shares become vested if a founder leaves the investee company after it is acquired?
Other provisions
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For how many days do the investee company and its founder(s) agree to be exclusive once the term sheet is signed?
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Do important decisions of the investee company require the consent of the lead investor or the investor majority?
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Who will pay the investor's expenses in the transaction? What is the maximum amount of fees and expenses?
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What is the closing date?
Jurisdiction
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If any party is based in Scotland, will the Term Sheet be governed by the laws of England and Wales or the laws of Scotland?
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Common terms in a Term Sheet
Term Sheets outline the key financial terms and other terms of a proposed investment. As a result, this Term Sheet covers the following:
Summary of terms for sale of series seed shares
This table sets out a summary of the terms which form the Term Sheet. Examples of these terms include, but are not limited to terms about:
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the company - providing the details of the investee company
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founders - providing the details of the founders of the investee company
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investors - providing the details of the investors, specifying who the lead investor is alongside any other investors
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drag along provisions - setting out when and how a majority shareholder can force the remaining minority shareholders to accept an offer to purchase the company
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founder shares - outlining relevant reverse vesting provisions that relate to the shares owned by the founders
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the non-binding effect of the Term Sheet - setting out which of the terms set out in the summary of terms are and aren’t legally binding. It also clarifies which country’s laws govern the legally enforceable terms
Signatures
The signature section of the Term Sheet is where all relevant parties (ie the lead investor, any additional investors and all founders) need to sign.
Appendix A - capitalisation table
This table sets out the relevant parties (ie all founders, the lead investor and any additional investors) and provides details of:
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the class of shares they hold or will hold (these will always be ordinary shares)
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the number of shares they hold or will hold
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their ownership share (ie a percentage based on how many shares they own out of all existing shares)
Management rights letter
If the lead investor has management rights, this management right letter will be relevant. It outlines the management rights and responsibilities that the lead investor is afforded under the Term Sheet. These include:
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the lead investor’s general rights - this includes the right to consult with and advise the management of the company on significant business issues
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examination of books and records - this is the right to examine the books and records of the company and to inspect its facilities
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confidentiality - this covers the lead investor agreeing to maintain the confidentiality of any information they learn in connection with the Term Sheet
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termination - this sets out that the management rights set out in this letter will come to an end when any sale of the company is completed. It also highlights that the confidentiality provisions will continue to remain in force even after the termination of the management rights
If you want your Term Sheet to include further or more detailed provisions, you can edit your document. However, if you do this, you may want a lawyer to review or change the Term Sheet for you, to make sure it complies with all relevant laws and meets your specific needs. Ask a lawyer for assistance.
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Legal tips for making a Term Sheet
Be aware of which clauses in the Term Sheet are and aren’t legally binding
As the Term Sheet provides the basic terms under which an investor will invest in a company, only certain provisions are legally binding. These legally binding provisions are those which relate to confidentiality and exclusivity and (potentially) costs. The remaining provisions of the Term Sheet are not legally binding.
For more information, see the FAQ ‘Is a Term Sheet legally binding?’.
Understand when to seek advice from a lawyer
Ask a lawyer for advice if:
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you need to issue or sell shares of a class other than ordinary shares
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this document doesn’t meet your needs
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any of the parties are based outside of England, Wales and Scotland
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Term Sheet FAQs
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What is included in a Term Sheet?
This Term Sheet template covers:
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lead investor details
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conditions of the investment
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capital structure
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liquidation preference
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information rights
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management rights
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Why do I need a Term Sheet?
Whether you are a company seeking investment or are an investor looking to fund a business, you should always consider making a Term Sheet.
A Term Sheet addresses the significant aspects of an investment deal without setting out every small detail addressed by a binding contract. Instead, a Term Sheet lays the groundwork for a negotiation and ensures that the parties involved in the transaction agree on the most important aspects of the deal.
By setting out the terms of the future agreement, the Term Sheet reduces the likelihood of disputes further down the line. They also ensure that the costs associated with drafting a binding investment agreement are not incurred prematurely (eg before both parties know exactly what they want). This is because most of the negotiations between the parties take place before the Term Sheet is drafted, well before the final contract.
Investors use a Term Sheet as a basis for drafting binding investment documents. In other words, Term Sheets set out roadmaps for the final, legally binding funding agreements between the investor and the company.
For more information, read Term sheets.
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What is a seed investment?
A seed investment is an early-stage investment, which usually funds the first operations of a business, such as research and development. It's the invested capital that supports the business until it can generate cash or until it is ready for further investment. Seed investment is quite high-risk, so investors are often compensated for this type of funding with an equity stake in the business (ie shares).
For more information, read Startup funding.
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What is a lead investor?
The lead investor is the investor that contributes the largest portion of the investment. They play an important part in the development of a business, for it is usually they who sign the Term Sheet and engage in the seed investment.
Lead investors can be family members or friends of the business founder, high-net individuals (ie angel investors) or venture capital investors. Any other investors (ie those who contribute a smaller proportion of the investment than the lead investor) are referred to as ‘additional investors’ or simply ‘investors’.
For more information, read Funding your business and Startup funding.
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Which key factors should investors take into account before investing?
Before deciding to invest, investors should consider factors such as:
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information about the company (eg its business plan, management team, market position and competition)
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the level of control they'll have over the company and over the investment itself
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the ways they can get their money back in the event the company is sold or closes down
For more information, read Term sheets.
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What is an employee share option plan?
Employee share ownership (also known as an ‘employee share scheme’) enables employees to own shares in their company. An employee share option plan (or 'ESOP') is a plan that provides a company's employees with shares in the company. By offering employee ownership employees are incentivised as they share in the financial rewards resulting from the success of the company.
For more information, read Employee share schemes.
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Is a Term Sheet legally binding?
The Term Sheet is not intended to be legally binding. However, there is an exception for certain clauses, commonly those dealing with confidentiality, exclusivity and sometimes costs. This is because a Term Sheet acts as evidence of serious intent, but does not form an agreement in itself.
On the other hand, the investment agreement which is drafted based on the Term Sheet is legally binding.
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What is a management rights letter?
Management rights provide an investor with advisory and consultative rights. Investors often request a management rights letter when investing in a company to satisfy their operational requirements. Management rights typically include the ability to advise and consult with the management of the company, attend board meetings and inspect the company's books and records.
If an investor is granted management rights under this Term Sheet, a management rights letter will be created.
For more information, read Term sheets.
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