Financing Term Sheet Deep Dive: An Overview

Whether you’ve only recently decided to seek out capital for your business or have already received (or made) your first offer, the term sheet (or “letter of intent”) is an integral part of the process.  In this series we’ll look to shed some light on the legal language contained in a financing term sheet by taking a “deep dive” into the most often used terms and how choices made in selecting those terms can affect both the Company and the Investor.  

Financing Term Sheet Deep Dive will be published each Monday morning until conclusion. For more information, check out or drop Rick a line at


One of the primary times that a client will seek out my advice is when they are faced with reviewing (or drafting) a term sheet for the sale (or purchase) of a company’s stock. For those who have not gone through the process, the notion of a term sheet (a document that lays out the basics of a proposed transaction but not in sufficient detail to actually effect the sale) can seem a little odd or even antiquated.  What good is a document that expressly states that it is “non-binding”, after all?

The easiest answer, like many things in the law, is that offering a term sheet before drafting definitive documents is simply the way things are done.  But, while true, that answer is not only pat (and somewhat unhelpful), it is also incomplete.

A term sheet is a roadmap.  It is a relatively low-cost document to put together that ensures that both parties have basic agreement on what is to be purchased, what is to be sold, and what money (or other promises) will change hands in the process of the buying and the selling.  While it is true that a negotiated term sheet is not binding when it comes time to ask for the purchase agreement (or other documents) to be signed, the term sheet itself serves a useful process in helping the parties even get to that point.  If the parties can’t agree on the basics, then there is no need to go forward.

A term sheet is a commitment.  Neither the Company nor the Investor wants to see their time wasted or legal fees expended on a deal that ultimately doesn’t happen.  A term sheet serves as the starting point for what can be a months-long process of phone calls, meetings, and legal work that culminates in the signing of definitive documentation and the sale of whatever Company security is being sold.  By simply executing a term sheet, both the Company and the Investor are signalling that they are willing to enter into that (sometimes arduous) process, and all with the intent of effecting the contemplated transaction at the end of the day.

A term sheet is negotiated leverage.  Though non-binding, the term sheet is a powerful device in the process of negotiating the definitive documents that will ultimately evidence the contemplated transaction.  I cannot count the number of times that I (or my opposing counterpart) have argued against definitive agreement terms because they are “off term sheet” or otherwise in violation of the spirit of the originally contemplated transaction. While such changes to a deal can be made (and are sometimes required if the diligence process turns up something unexpected), both sides know that movement “off term sheet” is a request for special allowance, and that the side making it can oftentimes expect to “pay” for that request

So term sheets, despite their non-binding status, are quite important and should be reviewed by counsel before drafting or execution.  With that as background, we will be spending the next several weeks taking a closer look at some of the most often used components of a term sheet, and how each can affect both sides of the financing transaction.  Terms I intend to review and comment on more closely include:



Liquidation Preference

Board Representation

Protective Provisions

Conversion Rights

Anti-Dilution Protection

Redemption Rights

Registration Rights

Participation Rights

Rights of First Refusal and Co-Sale



If you’d like additional background, both on the look and language regularly contained in a standard Series A financing term sheet,  I will be basing my discussion in part on the order and prominence of certain terms set forth in the National Venture Capital Association (“NVCA”) Model Term Sheet.  I’ve attached a copy to this post, but you can find additional copies (as well as versions of the definitive documents used to evidence these terms) here.

As always, if you’d like to discuss any or all of this post please leave a comment down below or contact me through my website at


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