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Understanding the Anatomy of a Term Sheet in Investment Banking



What is a Term Sheet?

As a finance student, you'll likely come across the term "term sheet" when studying investment banking and finance. But what exactly is a term sheet, and what does it include?


In investment banking, a term sheet is a non-binding document that outlines the basic terms and conditions of an investment or financing deal between two parties. It serves as a starting point for negotiations and helps both parties understand the structure of the proposed transaction.


A term sheet is typically prepared by the investment bank or other financial intermediary that is assisting in the transaction, with input from both the investor and the company seeking funding.


Once the term sheet has been agreed upon, it can be used as the basis for the formal legal agreement that will be drafted by lawyers representing both parties.


So what exactly does a term sheet include?

The specific terms and conditions will vary depending on the type of investment or financing deal, but here are a few examples of what a term sheet might include


1. Venture Capital (VC) Term Sheet: In a venture capital deal, a term sheet might include the following key terms:

  • The amount of funding being offered by the VC firm

  • The valuation of the company (i.e. the pre-money and post-money valuation)

  • The type of securities being issued (usually preferred stock)

  • The rights and privileges of the investors (such as board seats or veto rights)

  • The conditions for disbursement of funds (such as the achievement of certain milestones)

  • The liquidation preference (i.e. the order in which investors get paid in the event of a sale or liquidation)

  • Anti-dilution provisions to protect the investors' equity stake

  • The terms for conversion of preferred stock into common stock

  • Any management or governance changes required by the VC firm

2. Mergers & Acquisitions (M&A) Term Sheet: In an M&A deal, a term sheet might include the following key terms:

  • The purchase price being offered by the acquirer

  • The payment structure (e.g. all cash, stock, or a combination)

  • The conditions for closing the transaction (such as regulatory approvals)

  • The timeline for due diligence and other pre-closing activities

  • The representations and warranties of the seller

  • Any indemnification or escrow arrangements to protect the acquirer against potential liabilities

  • The treatment of existing contracts, employees, and other assets and liabilities

  • Any post-closing obligations or restrictions on the seller (such as non-compete clauses)

3. Debt Financing Term Sheet: In a debt financing deal, a term sheet might include the following key terms:

  • The amount and type of debt being offered (such as senior or subordinated debt)

  • The interest rate and repayment schedule

  • Any collateral requirements or security interests

  • Any financial covenants or performance metrics required of the borrower

  • Any prepayment penalties or other fees

  • Any representations and warranties required of the borrower

  • Any conditions for disbursement of funds (such as the achievement of certain financial ratios)

  • Any default or acceleration provisions in the event of a breach of the terms of the agreement.

It's important to note that a term sheet is not a legally binding document, but rather a summary of the key terms and conditions of the proposed investment or financing deal. As such, it is subject to change and revision during the negotiation process, and the final agreement may differ in some respects from the original term sheet.


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