DOING BUSINESS IN NIGERIA? You should understand term sheets and how they work.

Written by Techlawyered

June 4, 2019

A TERM SHEET is an agreement setting forth the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.

A Term Sheet summarizes the main points of a deal agreement and sorts out the differences in it, before actually executing the legal agreements and starting off with the time-consuming due diligence. They are most often associated with startups. Entrepreneurs find that this document(term sheet) is crucial to attracting investors, especially venture capitalists (VC). Term sheets can however, vary depending on what type of funding round you are in, how much is at stake, and as well as who is involved.

Generally term sheets for seed rounds are going to be much lighter and shorter than for Series A or beyond. The less, there is at stake, the less complex the term sheet should be, as no one wants to unnecessarily splurge on extra legal fees, or burning time.

A term sheet itself is not an executed deal, or even a promise. There is still due diligence to be done. So both sides can walk away when the need arises, with no hard feelings or the dragging of reputation on either side.

A term sheet includes the following: Who is issuing the note or stock, The type of collateral being offered, The valuation, Amount being offered, Shares and prices, What happens on liquidation or IPO, Voting rights, Board seats, Conversion options, Anti-dilution provisions, Investors rights to information, Founders obligations, among others.

In conclusion, entrepreneurs should exploit the use of term sheets in other to fully entertain all business projections which will help protect them from any unforeseen liabilities, and stories that may touch the heart but get nowhere in the court of law.

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