Term Sheet Interpretation Lawyers & Attorneys - Priori

Term Sheet Interpretation Lawyers & Attorneys

A venture capital term sheet is a document that outlines the general terms of a deal between a company and an investor or group of investors. A term sheet, which may either be binding or non-binding, serves as the blueprint for the final agreement between the parties as well as the formal investment documents that paper such an understanding. Priori is committed to finding you the right lawyer in our curated marketplace to help navigate this process.

Some of the typical provisions in a term sheet include:

  • Amount of anticipated investment. The term sheet will set forth the amount--or range of amounts--the new investor intends to invest in the company.

  • Grant of equity. A term sheet often specifies how much company equity will be granted to the investor in exchange for funding. It also specifies any valuation assumptions taken into account with respect to such equity grants. Equity is often granted to the investor in the form of convertible preferred stock.

  • Pre-money/post-money valuations. The pre-money valuation is an estimate of the value of the company before the financing round considered in the term sheet. The post-money valuation is an estimate of the company’s value immediately following the completion of the financing round. Whether the term sheet includes a pre-money valuation, a post-money valuation or both, such valuation assumptions significantly impact the amount of equity given to investors in exchange for the financing infusion, and therefore, you should calculate them carefully.

  • Anti-dilution protection provisions or anti-dilution clauses. Stock dilution occurs when a shareholder's percentage ownership in the company, measured in shares, decreases because the total number of shares issued increases. For example, if the company issues new shares or if employees exercise their stock options, the total number of shares may increase, resulting in dilution of shares for shareholders like investors. Generally, investors are concerned with stock dilution that also reduces the value of their percentage ownership in the company. For instance, if a company issues new shares but new shareholders pay the same price or more than the first investor paid for their shares, the value of the company will increase and this may still result in no change or sometimes even an increase in the value of an investor's stock, even if their percentage ownership in the company technically decreases as a result of the new shares. To avoid share dilution that decreases the value of their investments, investors often include anti-dilution clauses in term sheets. These clauses typically work by adjusting the price at which preferred stock converts into common stock. The two most common types of anti-dilution protection provisions are (1) full ratchet anti-dilution clauses, which reduce the price at which preferred stock converts to exactly the price at which the new shares are issued and (2) the weighted average method, which reduces the price at which preferred stock converts, but that price is not exactly equal to the price at which the new shares are issued - instead, it is based on a predetermined formula. Overall, anti-dilution provisions help investors avoid stock dilution and maintain their equity percentage in the event that subsequent financing rounds occur. Such financing rounds could result in share dilution without including some sort of anti-dilution protection in the term sheet.

  • Corporate governance provisions. Many corporate governance provisions appear in a company’s certificate of incorporation and bylaws. The provisions typically covered in a term sheet generally relate to the voting and procedural rights of the new investors as compared with existing shareholders. For example, a term sheet may specify how many board seats will be appointed by the new investors and may list certain kinds of key corporate decisions requiring the assent of specific classes of board members.

  • Protective provisions. Generally, protective provisions specify a range of important corporate provisions and dictate the minimum voting thresholds or the specific shareholders who must assent in order to make certain types of decisions. Key decisions typically covered by protective provisions include mergers, acquisitions, stock sales, and issuance of new debt or equity securities.

  • Conversion rights. If convertible preferred shares are issued to investors during the financing, the term sheet will specify the circumstances under which such convertible preferred shares may be converted to common shares of the company and at what ratio such a conversion would go into effect.

  • Right of first refusal. A right of first refusal requires the company, when issuing new securities, to first offer these shares to an investor before offering the new securities to third parties. Generally, a company must repeat this offer each time the company changes the terms of the newly offered securities.

  • Drag along provisions. A drag along provision, also known as bring along rights or drag along rights, allows an investor or a group of investors to compel the other shareholders to vote in favor of specified corporate decisions, typically a sale or merger of the company. For example, a common drag along provision allows a majority investor to force minority investors to sell their shares under the same terms alongside the majority investor under certain circumstances. These bring along rights help ensure that majority shareholders can attract a potential buyer if they want a smooth exit. With drag along rights, potential buyers are assured that so long as they negotiate successfully with a majority shareholder, they will not need to acquire the consent of multiple minority shareholders.

  • Co-sale rights. Co-sale rights enable benefiting shareholders to sell a specified proportion of shares in the event that other specified investor classes are selling shares of the company to a third party. Typically, co-sale rights require that the benefiting investors are able to sell a pro rata portion of their shares to the same third party on equally favorable terms.

  • Voting rights. Voting provisions detail the voting rights of each class of shareholders, including the new investor or investors.

  • Access to financial statements and other information. This provision dictates what company information is available to investors (i.e. financial statements, meetings with management) and the frequency with which the investor can expect to receive such information (i.e. monthly, quarterly, annually).

  • Key Person Clause. A key person clause, sometimes known as a key man clause, helps investors protect their investment by ensuring that a particular individual or group of individuals, such as a key employee necessary for the company's operations or a founder, will not leave the company.  These clauses are common in venture capital financing documents to help ensure that co-founders and other key personnel stay with the company as a way to protect their investments. In practice, these clauses often work by requiring the key employee or employees to spend a particular amount of time working with the company. If the key employee or employees fail to do so, investors are not required to make any further investment payments to the company.  

Priori Pricing

The cost of navigating the term sheet process varies significantly, depending on a variety of factors. Priori lawyers can help you understand and negotiate term sheets from an investor for anywhere from $150 to $600 an hour. Priori clients enjoy a net-15% discount on standard hourly rates. In order to get a better sense of cost for your particular situation, put in a lawyer request, schedule a complimentary consultation, and request a free price quote from our lawyers.

Frequently Asked Questions

Who is responsible for preparing the term sheet?
Generally, the term sheet will originate with the investor. It is expected that the company will negotiate the term sheet. To protect your interests, it is important to approach this process with the help of an experienced venture capital lawyer.

Does signing a term sheet have any legal ramifications, since it is non-binding?
Yes, most term sheets will have confidentiality clauses, prohibiting the release of any information about the deal to third parties. Additionally, a term sheet may require the company to refrain from seeking out or negotiating with other potential investors for a certain period of time – typically between 30 and 90 days.


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