Let’s Get to Know the Terms in a Term Sheet

In the business realm, a term sheet document plays a crucial role as the foundation of investment agreements between companies and investors. However, understanding the terms used in a term sheet often presents its own challenge. Below are some terms that need to be recognized to understand the important clauses in a term sheet:

Valuation: Evaluation of the company’s value, which often serves as the starting point in the negotiation process between investors and company founders.

Equity: A portion of ownership in the company held by investors in the form of shares.

Debt Financing: Source of funds provided to the company in the form of a loan, which is required to be repaid with interest after a certain period.

Anti-Dilution Protection: Provision designed to protect the investor’s ownership of shares from decreasing in value when the company issues additional shares.

Right of First Refusal: The right for investors to purchase additional shares before they are offered to others.

Liquidation Clause: Requirements regarding the distribution of proceeds from the sale of company assets to shareholders.

Priority Payment Clause: Priority order in distributing proceeds from the sale of company assets to shareholders.

Anti-Sandbagging Agreement: Provision that establishes that the buyer still has the right to claim damages if there is a breach in representations or warranties by the seller, even if the seller knew or should have known about the breach.

Limited Liability: Principle that limits the shareholders’ liability for the company’s debts, so they are only responsible up to the amount they have invested.

Release: Agreement that releases one party from certain obligations or responsibilities, such as releasing investors from additional investment obligations in the future.

Understanding these terms will help you read and understand the important clauses in a term sheet. It’s best to always consult with legal or financial experts before signing such documents to ensure that your interests are well-protected. Consulting with Documenta can be one of the alternatives you can use. Let’s consult your company’s legality for free with Documenta.