Term Sheet

A term sheet, also known as a memorandum of understanding (MOU), is a document that outlines the major points of a business agreement and is used to formalize the terms of a proposed business deal. It is usually prepared as a precursor to a formal agreement and is typically used in venture capital transactions.

A term sheet outlines all the agreement terms between two parties, including business objectives, governance and decision-making guidelines, profit/loss sharing, termination provisions, investment rights, governance and other pertinent payment terms. The term sheet also typically includes other details such as negotiation time frames, clauses for confidential information, and pre-negotiated financing structures.

The term sheet is meant to provide a blueprint for the negotiation of a formal business agreement, and it should capture the overall economic terms and deal structure of the transaction. After the parties come to an agreement on the terms of the term sheet, the sheet usually serves as a template for drafting the definitive documents that come after.

For example, a term sheet could be used in a venture capital transaction. In this type of transaction, it is customary for the venture capital firm to enter into a private negotiation with the start-up company it wishes to invest in. If terms are agreed to during these negotiations, the venture capital firm may prepare a term sheet outlining the terms of the deal. Once the venture capital firm and the start-up company sign the term sheet, negotiations then turn toward preparing a more formal, binding document. This document could include provisions on securities, the board of directors, and other legal matters. The formal document will be based on the term sheet and is meant to codify the legal and economic principles that have been agreed upon.