Term Sheet

Term Sheet

What is a term sheet?

A term sheet is a concise, usually nonbinding document that records the principal terms and conditions under which parties intend to proceed with a transaction. It serves as a framework for negotiating and drafting the definitive, legally binding agreements that follow.

Key takeaways

• Summarizes major deal points without every legal detail.
• Commonly used in venture investments, mergers and acquisitions, and debt financings.
• Typically nonbinding, but may include binding elements (e.g., confidentiality, exclusivity).
• Helps align expectations and accelerates drafting of final contracts.

Purpose and typical uses

Term sheets:
* Clarify the overall purpose and parties to a deal.
* List the principal terms needed to move negotiations forward.
* Set a timeframe or expiration date to prompt timely action.
* Invite feedback and revisions, often via tracked digital drafts.

They are commonly used by entrepreneurs seeking investors, lenders offering loans, buyers and sellers in M&A, and developers in commercial real estate.

Common elements in investment term sheets

Investment term sheets outline how capital will be provided and how ownership and control will be structured. Typical items include:
* Valuation: pre-money and post-money figures, and any valuation cap for convertible instruments.
* Investment amount and percentage stake.
* Anti-dilution provisions and pro-rata rights for future rounds.
* Voting rights and board composition.
* Liquidation preference (order and priority of payouts on a sale or liquidation).
* Investor commitment and vesting periods.
* Dividends or distribution rights.
* Drag-along and tag-along clauses (rights and obligations of majority and minority holders).
* No‑shop/exclusivity provisions restricting the company from soliciting other offers for a set period.
* Any conversion mechanics for convertible notes or SAFEs.

Common elements in debt agreement term sheets

Debt term sheets summarize the lender’s basic conditions and borrower obligations. Typical components include:
* Loan amount and permitted uses.
* Interest rate structure (fixed, variable, spreads).
* Term and repayment schedule.
* Collateral required to secure the loan.
* Financial covenants and reporting requirements.
* Guarantees or recourse provisions from sponsors or third parties.
* Loan fees, closing costs, and administration charges.
* Conditions precedent to closing and any extension rights.

Who prepares a term sheet?

• Investors or acquirers frequently draft term sheets for equity or M&A deals.
• Lenders typically provide term sheets for loans and credit facilities.
• In some negotiated transactions, either side may draft the initial version; the document is then exchanged and revised.

How a term sheet relates to LOIs and MOUs

Term sheets, Letters of Intent (LOIs), and Memoranda of Understanding (MOUs) are similar: all are preliminary documents that outline intended terms. Differences are largely practical:
* LOI: often announces a preliminary commitment or intent to proceed, commonly used in acquisitions.
* Term sheet: typically used in financings and investments to record specific deal economics and mechanics.
* MOU: often used for broader, multi-party agreements or joint ventures as an initial framework for negotiations.

All three can be nonbinding, though specific provisions (e.g., confidentiality, exclusivity) may be binding if so stated.

Common pitfalls to avoid

• Being too vague or too detailed—focus on material economics and control provisions.
• Failing to state which provisions are binding and which are not.
• Omitting realistic timeframes or deadlines.
• Neglecting key financial terms (valuation, liquidation, dilution, fees).
• Overlooking how convertible instruments will convert and affect ownership.

Example

A government housing program released a term sheet describing eligibility, qualifying property types, loan amounts, repayment terms, and program conditions. The term sheet defined who could apply and what standards must be met before a loan would be issued, providing a clear starting point for applicants and administrators.

Bottom line

A term sheet is the first structured step in negotiating a deal. By summarizing the material economic and governance terms, it aligns parties’ expectations and streamlines creation of the final binding agreements. Clear, well-drafted term sheets reduce misunderstanding and speed the transaction process.

Further reading

Sources and reference materials commonly used when preparing or reviewing term sheets include guidance from corporate counsel, investment banks, and financial institutions, as well as example program term sheets issued by governmental agencies.