Term Sheet for Private Equity Investments

What is a Term Sheet

A term sheet is a document which provides a summary of agreed terms and conditions in a proposed investment transaction. It contains the key elements of the transaction and facilitates the drafting of final comprehensive legal documents.

Legal Effect

Term sheets are generally non-binding and may be subject to the confirmation of satisfactory completion of due diligence or negotiation of additional conditions. However, some clauses in the term sheets such as exclusivity period and confidentiality clauses are legally binding.

Term Sheet Provisions

The contents of a term sheet may vary based on factors such as the kind of investment transaction and the stage of investment. The clauses in a term sheet can be broadly categorised into funding, corporate governance and exit provisions.

  • Funding

Funding provisions provide details about the investment. These usually include information about the investor and the company, total funds being invested and a description of the type of securities being issued, for example, common shares or preference shares. Details on share price and number of shares being issued are also captured under the funding provisions.

  • Corporate Governance

Under corporate governance, terms relating to voting rights, board composition and information rights are detailed. The voting rights outline the rights of the investor to vote on corporate matters whiles board composition specifies the arrangements on nominating directors of the company. Information rights indicates the extent of the company’s information disclosure requirements to the investors.

  • Other Provisions

Other provisions that may be included in a private equity investment term sheet are:

Pre-emptive right which refers to the right of existing shareholders to be offered the first option to purchase shares in the event of a proposed sale, transfer or disposal of shares in the company.

Tag-along-rights which refers to the right of minority shareholders to sell their shares in the company on the same proportional conditions.