daniel chigunweGodknows Hofisi
Introduction
It is an established practice when negotiating business agreements or deals that parties first agree on a term sheet.
A term sheet is essentially a brief document that outlines the material or key terms and conditions of a potential commercial agreement that parties wish to enter into. It can be binding or non-binding. Parties may use the term sheet for further negotiations.
When the parties to the potential business agreement sign the term sheet, it is said to be “executed.”
The term sheet is then used by commercial lawyers representing the parties to draft a detailed binding legal document such as an agreement or contract.
Use of term sheets
It is common for term sheets to be used in the following situations where for example one party wishes to raise finance under the business agreement:
Loans.
Investments.
Venture capital finance.
Mergers and acquisitions.
Joint ventures.
Term sheets for loans
Some of the key terms and conditions in terms of sheets for loans include the following items:
Loan amount.
Type of loan instrument for example term loan, overdraft, bond, bankers’ acceptance.
Tenure.
Interest rate.
Security.
Rights of lender and obligations by the borrower.
Term sheets for investments
Depending on the investment, a term sheet may include the following key terms and
Conditions.
Parties to the investment agreement.
Type of investments or instruments to be used, for example, ordinary shares preference shares, and characteristics such as whether convertible or redeemable.
Valuation of the company or shares.
Tenure of the investment and conditions for exiting.
Rights associated with the investment or securities.
Governance structures and systems.
Term sheets for venture capital financing
Venture capitalists are known for financ
ing start-up businesses and existing at
some point when the business has grown.
The term sheet in the case of venture
capital financing usually includes the
following key terms and conditions:
Parties to the business venture.
Amount to be raised.
Type of financing instrument for example ordinary shares, preference shares, any debt financing.
Pre-money valuation of the company or shares.
Post money valuation of the company or shares.
Voting rights of the financial instruments or securities.
Anti-dilution provisions.
Tenure and exit conditions.
Liquidation preference.
Term sheets for mergers or acquisitions
The key terms and conditions included
in a term sheet for mergers or acquisi
tions may include the following:
Parties to the merger or joint venture.
Valuation of the target company or its shares, price, or purchase consideration.
Mechanics of the transaction, for example, share swap, share acquisition, allotment, transfer, etc.
Securities to be exchanged or issued.
Voting rights of securities such as shares.
Governance structures and systems.
Term sheets for joint ventures
Joint ventures are very common in busi
ness. The key terms and conditions that
may be included in a term sheet for a
joint venture may include:
Parties to the joint venture.
Contributions by the joint venture
partners.
Financial instruments to be used.
Profit share.
Rights and obligations.
Governance structures and systems.
Conclusion
Term sheets are important documents
in deal structuring or business agree
ments. They give a summary of the key
terms and conditions to be included in
binding legal documents such as agree
ments. Parties may use term sheets for
further negotiations. Experienced legal
practitioners know how to draft com
mercial contracts based on executed
term sheets.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot-Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience in industry and commerce and is a former World Bank staffer in the Resource Management Unit.
He writes in his personal capacity./He can be contacted on +263 772 246 900 or [email protected]
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