A term sheet is a document in a bulleted list, laying down the terms and conditions of a contemplated business agreement. It is prepared by any of the proposing parties. The terms and conditions contained in this document are not binding to any of the parties. They are subject to modification through further negotiations before the final agreement is actually prepared and signed. It also lays the groundwork for ensuring that the parties involved in a business transaction agree on most major aspects of the deal, thereby precluding the possibility of a misunderstanding and lessening the likelihood of unnecessary disputes. It also ensures that expensive legal charges involved in drawing up a binding agreement or contract are not incurred prematurely.
It is an important and imperative document as it is an essential step to signing the final agreement. It contains a list of indicative terms and conditions and displays the intentions of entering into a funding or financing arrangement. It establishes relationships between investors, venture capital providers, start-ups, and other firms. Ultimately, it reduces the time required to negotiate a business agreement. It is customary to begin the negotiation of a venture investment with the circulation of a term sheet, which is a summary of the terms the proposer is prepared to accept.
It is fairly similar to a letter of intent from the proposer of a business agreement such as a business acquisition, private equity recapitalization, or refinancing in a new or a preexisting venture that is initiated by an investor, entrepreneur, or an intermediary agent. They act as a comprehensive agenda for further negotiations and a template for drafting the actual agreement.