Term Sheet
Candlefocus EditorThe negotiation process of a term sheet is a critical step in raising capital and is often lengthy. Depending on the complexity of the deal, the negotiation process involves the Issuer and its legal advisor, the investor, and their legal advisor. When multiple investors are involved, a lead investor might also be included in the process.
Given the importance of capital raising, terms sheets also serve to protect the investors’ interests. For example, investors may require certain covenants planned for the company, such as monopolistic protection and mandatory dividend payout. This ensures that Issuers use the funds in a disciplined manner and the investors are able to realize a return.
Term sheets play a pivotal role in the financing decisions of entrepreneurs and venture capitalists and are the beginning of structured capital investment deals. They provide a legal framework to the terms that make up a deal, while being flexible enough to accommodate the differing designations that separate venture capital deals from more traditional business financing. As such, they are a fundamental tool in the venture capital game.