A document that details terms of investment, a term sheet typically includes information on the company's valuation, its board of directors, disclosure requirements and pro rata rights. A term sheet also outlines change-of-control clauses and details confidentiality and exclusivity requirements.
A term sheet begins with a valuation of the company and explains how shares in the business are divided between investors and founders. Typically, the term sheet allocates preferred shares to investors and common shares to the founders of the company. The term sheet spells the voting rights of each class of shares, the amount of dividends to be paid on the shares and the payment schedule for these dividends. The term sheet states whether an investor has a seat on the board of directors, specifies the number of seats allocated to investors and outlines their voting rights.
A term sheet also typically includes pro rata rights, which stipulate the position of existing shareholders when the company decides to raise additional capital. Change-of-control clauses stipulate the events that may lead to the sale of part or all of the business, the rights of different classes of shareholders in such events, and the treatment of the shares of investors and founders following a sale. A term sheet may also include reverse vesting clauses, which allow the founders to take back company ownership after some years.