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Business Plan InformationThe Term Sheet’s Role in Raising Venture Capital
by:
Dave Lavinsky
Entrepreneurs and companies who are seeking venture capital often hash out with one or more venture capital firms on a number of important issues. These issues include the figure of capital to be raised, the investment terms, etc. The document which summarizes these terms is better-known as a "term sheet."
The term sheet is similar to a letter of intent, that is, it is a nonbinding summary of the key points of the transaction. These points are later covered in detail in the Stock Purchase Agreement and related agreements signed at the time of execution of the transaction.
The value of the abbreviated term sheet format is that it speeds up the process of consummating a transaction. Specifically, it allows the parties to agree on the general terms of the group action
rather than having to debate less important details. In addition, because it is not binding, it allows the parties to take their discussions to the next level without the danger of committing too much. Note, however, that several parts of a term sheet may be binding. Typically the binding aspects only refer to confidentiality and speech act
issues.
Venture capital firms, and not the companies seeking capital, typically prepare the term sheet to include the terms under which they are willing to invest their capital. Alternatively, once
seeking capital from angel investors, firms typically create their own term sheets for the angels to review. This fact tells a bit just about the balance of power in an investment transaction. Venture capital firms are often more sophisticated and have more power than the companies seeking capital. Alternatively, angel investors are typically less sophisticated and have less power, and are more prone to consider the investment terms as ordered
out by the institution seeking capital.
Getting to a term sheet is a key milestone in the capital raising process. Though not all term sheets result in a transaction, the term sheet shows that several parties are lawfully interested in corporal punishment a transaction. It is then up to the capitalist
and institution to agree upon the details.
Just just about the author:
GT Business Plans has developed over 200 business plans for clients that have put together raised over $750 million in financing, launched many
new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital
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