Term Sheet

A term sheet is a document which is usually non-binding and which sets out the key terms of an investment. It typically helps the negotiation process by ensuring the parties agree to the material terms before the binding (and much more comprehensive documentation is drafted).

The substance of the term sheet will depend on the particular transaction and the elements the parties view as important but may include the following:

• details of the investment, such as number and class of shares and purchase price
• description of what the corporation intends to do with the funds
• description of additional documentation that will need to be signed, including formal subscription agreement, shareholders agreement and any forms required for compliance with securities law
• confirmation of who is responsible for costs (often each party is responsible for their own costs, but other arrangements are often also made)
• there may be a confidentiality provision or, where a separate non-disclosure agreement (NDA) has been signed, the term sheet would confirm that the NDA applies to the term sheet
• lock-up provisions which prevent the corporation from entertaining offers from other investors during the specified period
• a list of any provisions that are binding - these generally include confidentiality, lock-up and cost provisions

A term sheet is a useful tool to help streamline the negotiation and document preparation process. However, it is important to really consider what the important issues between the parties will be in advance. Otherwise, the parties may end up in two separate rounds of negotiations - the first for the term sheet and the second when the documentation is prepared.