What is a term sheet?

A term sheet is a document that lays out the key conditions of an investment, whether that investment is in venture capital, debt capital, or another investment area.

Term sheets typically contain information like the size of an investment, what investors expect in return for an investment (e.g., an ownership percentage, interest payment, etc.), and any exclusivity agreements that may come with the investment.

The debt capital term sheet
The debt capital term sheet

In other words, term sheets show companies what they have to give up in order to get their investment in return. They also protect an investment by making sure that both parties are in alignment early on in a negotiation.

Once two parties come to an agreement on a term sheet, they can move towards executing a contract and fundraising transaction.

Why do term sheets matter?

A term sheet comes before a contract and is not a legally binding agreement.

So why do investors send them to companies?

In order to lay the groundwork for a relationship without going into all the details of an agreement.

Term sheets offer both sides of a deal the opportunity to assess whether it makes sense to continue a conversation.

If a company rejects all the major items in a term sheet, for example, it may not make sense for the investor and the company to keep talking. On the other hand, if a company agrees to what's in a term sheet, an investor can move forward knowing that there's a real opportunity to execute a transaction.

Importantly, even when two parties agree to a term sheet, neither side is legally bound to take further action.

How should I evaluate a term sheet?

We'll focus on debt capital term sheets here (if you're interested in learning more about VC term sheets, Funding Note has put together a great guide here).

We encourage you to work with financial and legal advisors as you evaluate the specific term sheets that your company receives. These advisors will be able to help you understand whether the interest rate, warrants, and other features of your debt investment offer align with the needs of your business.

For example, for a fintech lender negotiating the terms of a revolving credit facility, it will be important to model anticipated originations against the advance rates and concentration limits outlined in a term sheet. There's no one-size-fits-all solution for questions like these, nor is it necessary that business leaders become debt experts when they can lean on advisors, consultants, and software instead.

At the same time, we think all startup founders and executives should understand the broad strategy behind term sheet negotiation, as well as how it fits into their long-term growth plans.

At a high level, you should be asking yourself (or your advisors) how you're evaluating term sheets from different credit providers and which selection criteria matter most to your company, whether it's pricing, capital provider reputation, time to close, or the ability of the capital provider to support your future growth.

You should also work with all required stakeholders at your company to align on a target close date and post-close plan. If your revolving credit facility requires regular reporting, for example, you should confirm with your compliance, data analysis, engineering, and risk teams that you'll have access to the required data outputs as soon as you execute your credit agreement.

Want to learn more?

If you're interested in learning more about technology that can streamline your debt capital raise and management, just request a demo of Finley here. We'd love to chat!

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