An equity investment term sheet is a non-binding agreement that outlines the key terms of a potential investment. It is typically used to attract investors and to lay the foundation for a more detailed definitive agreement.
Term sheets can vary widely in length and complexity, but they typically include the following information:
- The name of the company seeking investment
- The amount of investment being sought
- The type of equity being offered (e.g., common stock, preferred stock)
- The price per share
- The liquidation preference
- The redemption rights
- The voting rights
- The board representation
- The restrictive covenants
- The termination provisions
A well-written equity investment term sheet can be a powerful tool for attracting investors and closing deals. By providing potential investors with a clear and concise overview of the key terms of the investment, you can increase their confidence and make it more likely that they will invest in your company.
Important Terms to Include
When drafting an equity investment term sheet, it is important to include all of the key terms that are relevant to the transaction. These terms may vary depending on the specific circumstances of the investment, but they typically include the following:
- The amount of investment: This is the total amount of money that the investor is committing to invest in the company.
- The type of equity: This refers to the type of ownership interest that the investor will receive in the company. The most common types of equity are common stock and preferred stock.
- The price per share: This is the price that the investor will pay for each share of equity that they receive.
- The liquidation preference: This is the amount of money that the investor will receive in the event that the company is liquidated.
- The redemption rights: This gives the investor the right to sell their shares back to the company at a specified price.
- The voting rights: This gives the investor the right to vote on important matters that affect the company.
- The board representation: This gives the investor the right to appoint a representative to the company’s board of directors.
- The restrictive covenants: These restrictions limit the company’s ability to take certain actions, such as issuing additional equity or incurring debt.
- The termination provisions: These provisions specify the conditions under which the investment agreement can be terminated.
By including all of the key terms in the equity investment term sheet, you can avoid misunderstandings and ensure that both parties are on the same page.
Negotiation and Closing
Once the equity investment term sheet has been drafted, it is important to negotiate the terms with the investor. The negotiation process can be complex and time-consuming, but it is important to get the best possible deal for both parties.
After the negotiation process has been completed, the parties can move on to closing the deal. The closing process involves the execution of the definitive agreement and the transfer of funds from the investor to the company.
Once the deal has been closed, the investor will become a shareholder in the company and will have the rights and responsibilities that are outlined in the equity investment term sheet.
