Term sheet(TS) is an important agreement signed between investors and startups in investment process. It specifies key terms of the potential deal before further due diligence. TS reflects core framework like transaction structure, investor rights, corporate governance and restrictions. Though not legally binding, TS builds trust between parties when investing in high tech startups. With VC industry growth, TS is widely applied in China investment deals. This article will analyze TS from legal nature, core clauses, and comparison with SPA and SHA.
ts has framework, non-binding and confidentiality nature
TS is a memorandum of understanding, belonging to contract category. But except confidentiality and exclusivity clauses, other terms don’t have legal binding force on investors. After TS, investors have no obligation to invest. However, TS is still important milestone for startups financing. Unless due diligence finds serious issues, startups normally have high probability to obtain investment after receiving TS. TS establishes trust between parties before legally binding SPA and SHA.
core ts clauses balance interests of investors and startups
TS clauses can be divided into commercial terms and legal terms. Commercial terms like valuation determine economic distribution. Legal terms like liquidation preference protect investor interests when conflict arises. Core clauses include valuation, vesting, liquidation preference, anti-dilution, drag-along right, board seats, protective provisions etc. These balance interests of investors and founders when investing in startups.
ts summarizes spa and sha frameworks
TS summarizes framework and focuses of SPA and SHA. SPA specifies share purchase details like investment amount, share price and closing conditions. SHA details shareholder rights and corporate governance. TS reflects core spirit of SPA and SHA. If startups agree unfavorable TS terms without legal review, they will be in passive position when negotiating SPA and SHA.
In summary, TS is important preamble of investment deals, guiding formal SPA and SHA agreements. With balanced terms, TS builds solid trust basis moving forward. Startups need ensure fair TS terms with legal support.