A primer to the Venture Capital term sheet in Singapore

venture capital term sheet Singapore

It’s your first time raising funds, and a venture capitalist has just presented you with a term sheet. You’re elated and your team of co-founders couldn’t be happier.

Now before you start breaking out the champagne, you should probably realize that a term sheet isn’t a legally binding contract. Basically, your deal isn’t a done deal yet.

While some of the provisions in the term sheet may be legally binding, most of the term sheet usually isn’t.

 

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So just what exactly is a term sheet?

A term sheet can mean different things in different contexts. In the investor community in Singapore, a term sheet is a legal document produced by the investor that outlines the provisions of the future final agreement that is given to a startup seeking investment.

It serves as a letter of intent by the investor(s) to the startup and facilitates the transaction between the parties. However, as mentioned earlier, the term sheet usually isn’t legally binding and the parties can, and usually do continue to negotiate most of the terms even after the term sheet is signed.

Usually, the only terms that tend to be binding in the term sheet are confidentiality and exclusivity (i.e. the founder will not enter negotiations with other investors during the time frame stipulated in the term sheet).

What purpose does the term sheet serve?

A venture capital term sheet serves two important functions:

1). It summarizes the important financial and legal terms related to the potential deal.

2). It quantifies the value of the financing by the investor, and by default, the value of the company.

While the terms and numbers may change in negotiations, the term sheet acts as an important baseline from which the lawyers will draft the eventual legal agreement if everything goes smoothly. Its value arises mainly from getting the parties to agree on the terms before initiating more expensive legal drafting.

From the perspective of a founder, a term sheet can serve an even more important purpose in the situation when the funding round requires an amount of money that’s more than what one investor alone is willing to provide. In these situations, the founder can then “shop” a term sheet from an investor to other potential investors, using the original investor as a reference point to bring other investors on board (with the blessing of the original investor of course). This can be particularly useful in later funding rounds.

Does anyone else use term sheets?

Yup. In the investor community, institutional investors, private equity firms, and angel investors (the more sophisticated ones) use term sheets as well. In a non- investor context, term sheets can also be used in business development deals and sales and purchase agreements.


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