What is a term sheet?

A term sheet is a document that outlines the key terms and conditions of an investment or financing. A term sheet may be used by a company seeking funding or by an investor putting together an investment portfolio.

Investors use them as part of their initial research into companies they might want to invest in. They also circulate among potential investors on first approach – it gives everyone some common ground for discussion and negotiation, and avoids wasting time with unnecessary meetings.

No, the term sheet is nonbinding. It should, however, contain enough information so that the parties can proceed to negotiate definitive agreements based on it. It is very common to include a non-negotiation clause. Which means that the parties will not negotiate with other parties for a certain period of time. Such non-negotiation clauses are generally included in order to speed up the process of reaching a definitive agreement.

A drag-along clause is optional but quite common to include in a term sheet. This instrument allows the holders of a majority shareholding to make the remaining shareholders or interest holders to sell their shares or interests to a third party. The purpose of the drag along clause is to provide the holders of the majority of the shares or interests with the ability to force a sale of the company in the event that they receive an offer that they believe is superior to any other offer that may be made. Thus, the drag-along clause protects majority shareholders, because he or she can ‘drag along’  smaller shareholders.

Whether you want to include one depends on if you want to protect a larger shareholder or not. In case you are a larger shareholder, you will probably benefit from this. For example, an investor investing in a company probably wants to include this. An investor will want to cash out at one point, and in order to sell successfully might need the other shareholders to be on board as well. Therefore a drag-along clause can be in favour of such an investor.

A tag along is also optional in the term sheet. It can be a useful instrument for minority shareholders because they provide security for them. If a company is sold, the tag along clause allows the minority shareholders to sell their shares at the same price as the majority shareholders. This protects the interests of the minority shareholders and ensures that they receive a fair price for their shares.

You can read more on the tag-along and drag-along clauses in our article on the shareholders’ agreement.

A must-offer obligation requires a shareholder to offer its shares to the other shareholders first before offering them to any other party. This clause helps to protect the interests of the shareholders and ensure that they are given the opportunity to buy the shares in the company before any other party. This is usually included, because it is considered a fair policy for all shareholders and investors.

An anti-diluting provision is useful in the event new shares are issued. For example when a new investor comes on board. An anti-diluting clause prohibits diluting the value of the shares held by the existing shareholders . This clause helps to protect the interests of the existing shareholders and ensure that they maintain a certain level of control over the company.

A pre-emption right, also known as a preemptive right or subscription right, is a term in corporate law that gives shareholders the right to maintain their proportional ownership in a company by subscribing first to new shares when they are issued by the company. This term helps to protect the interests of the shareholders and ensure that they are not diluted in their ownership stake.