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A term sheet is an agreement where two or more parties form a deal’s terms and conditions. The document holds a summary of the agreement’s main points. It ensures that all the involved parties know and understand what they are signing up for and what their legal agreements include. The term sheet is a non-binding document since it reflects the broad and key points of what the agreed investment will entail. Visit the following sections to understand what goes into a term sheet and what it’s used for.
The Uses of a Term Sheet
The term sheet includes the important parts of a deal, but it does not include every small detail. The term sheet exists to reduce the chances of any misunderstanding and ensure that the involved parties agree on the primary aspects of detail.
A term sheet typically includes information on assets, time frame, initial purchase price, and other details depending on the type of financial instrument involved.
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What is Included in a Term Sheet?
The details of any term sheet depend on what you are agreeing to. Your bond investment term sheet would look a lot different if it were for a different purpose. The following is the standard information included in every term sheet.
Valuation: The term sheet will include the company’s valuation if you are investing in an organisation’s stocks. It will also involve the percentage of stake, the investment amount, and anti-dilutive provisions.
Non-binding Terms: These terms refer to those aspects in which neither is obligated to follow.
Liquidation Preference: The term sheet will further include how the sale proceeds of a bond will be paid to the investor.
Investor Commitment: The investor commitment is the period for which one must be invested in a venture.
Risk Mitigation: If an investor is going into a debt agreement, then the term sheet will further include risk mitigation. It is where the bond issuer may provide certain issues or conditions that must be met before you can purchase the bond. These specific conditions may help you to reduce some potential risks.
Wrapping Up!
A term sheet is a crucial aspect of making any deal. Its contents change depending on the kind of deal you are making. But the essential parts remain the same across every term document. It still contains the conditions on which you purchase or sell an instrument. However, it is necessary to be thorough with your term sheet and ensure that you agree with everything given on the document. If something makes you uncomfortable, you can always request the issuer to alter it.
FAQs
1. What are some of the terminologies found in term sheets?
If it is an investment term sheet, then some of the common terminologies found there will include liquidation preference, dividends, valuation, etc. Familiarise yourself with these words to understand what your document includes.
2. How to write a term sheet?
A term sheet must summarise the conditions of a deal and should include both binding and non-binding conditions. One must also include the time frames and every other detail important for the investment.
3. Does every term sheet include the same contents?
No, not every term sheet will look entirely the same. Some general aspects are similar, but the rest depend on what kind of agreement you are entering into.
