The Funding Term Sheet is a foundational document in the US investment landscape, typically used during the preliminary stages of a financing round when a company is seeking capital investment. This document outlines the principal terms and conditions under which an investor (or group of investors) proposes to invest in a company, covering crucial elements such as valuation, investment amount, security type, and key investor rights. While predominantly non-binding, except for specific provisions like confidentiality and exclusivity, the Term Sheet serves as the blueprint for the subsequent definitive agreements. It must comply with US federal securities laws and state-specific regulations, particularly when dealing with private placements under Regulation D exemptions. The document is essential for establishing clear expectations and alignment between parties before incurring the cost and time of full legal documentation.
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1. Parties: Identification of the company and the investor(s)
2. Transaction Overview: Brief summary of the proposed investment including type of security and total funding amount
3. Company Valuation: Pre-money and post-money valuation of the company
4. Investment Terms: Detailed terms including price per share, number of shares, and type of securities being issued
5. Investor Rights: Key rights granted to investors including information rights, pro-rata rights, etc.
6. Governance: Board composition, voting rights, and major decision approval requirements
7. Liquidation Preference: Terms defining investor preferences in case of liquidation or exit
8. Anti-dilution Provisions: Protection mechanisms against future down rounds
9. Confidentiality: Terms regarding the confidential treatment of the term sheet and related discussions
10. Closing Conditions: Prerequisites that must be met before the investment can close
11. Binding Terms: Specification of which terms are binding (typically confidentiality and exclusivity) and which are non-binding
1. Exclusivity Period: Used when investors require exclusive negotiating rights for a specific period
2. Conversion Rights: Include when offering convertible securities to detail conversion mechanisms and triggers
3. Dividend Rights: Include when the investment includes specific dividend provisions
4. Registration Rights: Include for larger investments where IPO participation rights are relevant
5. Right of First Refusal: Include when investors seek preferential rights to purchase shares in future rounds
6. Co-Sale Rights: Include when investors want the right to participate in founders' share sales
7. Drag-Along Rights: Include when majority stakeholders want the right to force minority holders to join in a sale
8. Employee Pool: Include when establishing or modifying an employee stock option pool
1. Cap Table: Pre and post-money capitalization table showing ownership structure
2. Use of Proceeds: Detailed breakdown of how the investment funds will be used
3. Key Employee List: List of key employees and their roles, if relevant to closing conditions
4. Existing Agreements: List of material agreements that may affect the investment
5. Financial Statements: Current financial statements and projections
6. Milestone Schedule: If investment is milestone-based, details of milestones and associated payments
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