| Entrepreneurs and companies who are seeking | | | | binding aspects only refer to confidentiality and |
| venture capital often negotiate with one or more | | | | disclosure issues. |
| venture capital firms on a number of important | | | | Venture capital firms, and not the companies seeking |
| issues. These issues include the amount of capital to | | | | capital, typically prepare the term sheet to include the |
| be raised, the investment terms, etc. The document | | | | terms under which they are willing to invest their |
| which summarizes these terms is known as a "term | | | | capital. Alternatively, when seeking capital from angel |
| sheet." | | | | investors, firms typically create their own term |
| The term sheet is similar to a letter of intent, that is, | | | | sheets for the angels to review. This fact tells a bit |
| it is a nonbinding summary of the key points of the | | | | about the balance of power in an investment |
| transaction. These points are later covered in detail in | | | | transaction. Venture capital firms are often more |
| the Stock Purchase Agreement and related | | | | sophisticated and have more power than the |
| agreements signed at the time of execution of the | | | | companies seeking capital. Alternatively, angel |
| transaction. | | | | investors are typically less sophisticated and have less |
| The value of the abbreviated term sheet format is | | | | power, and are more prone to consider the |
| that it speeds up the process of consummating a | | | | investment terms as laid out by the company |
| transaction. Specifically, it allows the parties to agree | | | | seeking capital. |
| on the general terms of the transaction rather than | | | | Getting to a term sheet is a key milestone in the |
| having to debate less important details. In addition, | | | | capital raising process. Although not all term sheets |
| because it is not binding, it allows the parties to take | | | | result in a transaction, the term sheet shows that |
| their discussions to the next level without the danger | | | | both parties are legitimately interested in executing a |
| of committing too much. Note, however, that some | | | | transaction. It is then up to the investor and |
| parts of a term sheet may be binding. Typically the | | | | company to agree upon the details. |