Introduction
It is established practice when negotiating business agreements or deals that parties first agree on a term sheet. A term sheet is essentially a brief document that outlines the material or key terms and conditions of a potential commercial agreement that parties wish to enter into. It can be binding or non-binding. Parties may use the term sheet for further negotiations.
When the parties to the potential business agreement sign the term sheet it is said to be “executed”. The term sheet is then used by commercial lawyers representing the parties to draft a detailed binding legal document such as an agreement or contract.
Use of terms sheets
It is common for term sheets to be used in the following situations where for example one party wishes to raise finance under the business agreement:
- Loans.
- Investments.
- Venture capital finance.
- Mergers and acquisitions.
- Joint ventures.
Term sheets for loans
Some of the key terms and conditions in terms sheets for loans include the following items:
- Loan amount.
- Type of loan instrument for example term loan, overdraft, bond, bankers’ acceptance.
- Tenure.
- Interest rate.
- Security.
- Rights of lender and obligations by borrower.
Term sheets for investments
Depending on the investment a term sheet may include the following key terms and conditions:
- Parties to the investment agreement.
- Type of investments or instruments to be used, for example ordinary shares, preference shares and characteristics such as whether convertible or redeemable.
- Valuation of the company or shares.
- Tenure of the investment and conditions for exiting.
- Rights associated with the investment or securities.
- Governance structures and systems.
Term sheets for venture capital financing
Venture capitalists are known for financing start-up businesses and exist at some point when the business has grown. The term sheet in the case of venture capital financing usually include the following key terms and conditions:
- Parties to the business venture.
- Amount to be raised.
- Type of financing instrument for example ordinary shares, preference shares, any debt financing.
- Pre-money valuation of the company or shares.
- Post money valuation of the company or shares.
- Voting rights of the financial instruments or securities.
- Anti-dilution provisions.
- Tenure and exit conditions.
- Liquidation preference.
Term sheets for mergers or acquisitions
The key terms and conditions included in a term sheet for mergers or acquisitions may include the following:
- Parties to the merger or joint venture.
- Valuation of the target company or its shares, price or purchase consideration.
- Mechanics of the transaction, for example share swap, share acquisition, allotment, transfer, etc.
- Securities to be exchanged or issued.
- Voting rights of securities such as shares.
- Governance structures and systems.
Term sheets for joint ventures
Joint ventures are very common in business. The key terms and conditions that may be included in a term sheet for a joint venture may include:
- Parties to the joint venture.
- Contributions by the joint venture partners.
- Financial instruments to be used.
- Profit share.
- Rights and obligations.
- Governance structures and systems.
Conclusion
Term sheets are important documents in deal structuring or business agreements. They give a summary of the key terms and conditions to be included in binding legal documents such as agreements. Parties may use term sheet for further negotiations. Experienced legal practitioners know how to draft commercial contracts based on executed term sheets.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
