what s included in a term sheet 
the details in a term sheet depend on what s being agreed to for an angel investment the early funding investment term sheet will be substantially different from what s included in one for a commercial real estate development generally though there are standard details included for debt agreements here is what s commonly included a term sheet may be signed by both parties to formally signify that each side has agreed to the terms and that each team s legal council may proceed with drafting a formal agreement terms found in a term sheetterm sheets often have standardized language here are some specific terms discussed in two different types of term sheets dividends investors may want clarity on what net income distributions they will be entitled to in addition to clarifying the dollar amounts investors may want to know the timing i e monthly quarterly or annually drag along clause investors may want guarantees that minority stakeholders will follow the guidance of majority stakeholders liquidation preference investors may want to know the order in which owners are paid if the company gets sold this reduces the risk to investors no shop agreement this outlines the terms that restrict the company from taking investment money from other people for a specific period pro rata rights investors may want to better understand their rights for future investing rounds for example depending on their present investment they may be entitled to the right of first offer for an investment offering in the future meanwhile there may be penalties for investors who decide not to participate in future investment rounds valuation pre money and post money investors might want the pre money and post money valuations done before an official investment agreement is drafted valuation cap this is the value at which convertible notes can be converted into equity often a crucial point in negotiations this figure should be discussed early between the parties to ensure a fair starting point for the startup s valuation and to protect the investor voting rights investors may be interested in what they say they have over the company s operations this may be an agreement on the number of votes the investor receives or any restrictions on matters about which they aren t eligible to vote collateral borrowers may have to post collateral to substantiate value in case of default this is often the underlying asset the debt supports and the lender may require the first deed of trust financial covenants borrowers may need to prove financial health to the lender this includes providing certified financial statements guarantee statements or other records following the agreed upon covenants with the lender guarantee borrowers may need to identify a legal entity with established credit to vouch for the debt and be liable if the company defaults interest rate depending on the loan terms may vary widely the interest rate may include a fixed spread rate plus a variable rate for long term loans for example it might be a one month term with a secured overnight financing rate sofr the latter is a benchmark interest rate for dollar denominated derivatives and loans which reflects the cost of borrowing cash overnight collateralized by treasury securities loan amount borrowers need a specific amount of funds to borrow this term may be a fixed dollar amount subject to loan to value metrics a debt service coverage ratio and net operating income calculations loan costs besides interest a lender may require an annual administration fee or a one time closing fee these expenses can be significant for bigger loans and borrowers should review upfront costs before loan proceeds are distributed term borrowers must know when the loan is fully payable for open lines of credit or development loans this is the period during which interest is assessed but principal payments may not be due tips for writing a term sheetevery term sheet will vary as the parties conditions and agreement will rarely be repeated still here are broad tips for drafting a term sheet that applies to almost every situation summarize the conditions at the beginning of the term sheet draft a summary identifying the agreement s overall purpose and the intended outcome this includes explicitly addressing the project e g seed a funding of company xyz or residential development of 254 units in los angeles ca identify each legal party involved state binding non binding terms a term sheet should explicitly state whether the agreement is binding or nonbinding this is often noted early in the term sheet list the terms understand that a term sheet is the first formal information the opposing party may receive while the term sheet should not include the complete list of details in the agreement it should provide enough information to entice the other party without overwhelming them cover the most important aspects of the deal with the understanding that minor details can be sorted out later state the time frames even if the term sheet is nonbinding it should include an expiration date that requires the opposing party to take action by a specific time this encourages participation and action on the term letter and ensures the terms are not stale or unfavorable if held open too long encourage feedback consider distributing a digital version of the term sheet that tracks changes ideally the first draft would be a complete meeting of the minds with no further changes needed realistically this is rare ensure the other party tracks any changes allowing each side to quickly identify areas not yet in agreement a company will often solicit many term sheets and compare the terms across bidders it will then move forward with the term sheet that is most favorable though it may decide to negotiate with others too documents similar to term sheetsterm sheets are like many other documents so it s important to understand the differences a letter of intent loi is a document that declares a preliminary commitment by one party to work with another these are common in business transactions where one company announces its intention to do business with a second company a term sheet is often like an loi when the action is one sided as in acquisitions or a working document to serve as a jumping off point for more intensive negotiations the main difference between an loi and a term sheet is stylistic the former is written as a formal letter while the latter comprises bullet points outlining the terms memorandums of understanding mous outline agreements between two or more people or organizations in a formal document mous are not necessarily legally binding but show that all parties are willing to move forward with a contract they often serve as the starting point for contract negotiations or mergers although term sheets are distinct from lois and mous the three documents are often referred to interchangeably because they accomplish similar goals and contain similar information example of a term sheetin 2024 the new york city department of housing preservation development released a term sheet for its homefirst down payment assistance program 1 the program is intended to help low income people buy owner occupied homes by offering forgivable loans to use toward a down payment the term sheet outlines which entities are eligible for the program what home types qualify the loan amount loan terms as well as construction requirements at the end of the term sheet the department s contact information is shown so interested parties who agree to these terms can communicate with the nyc office of development 