Definition
A term sheet in private equity is a non-binding agreement stipulating the basic terms and conditions for an investment. It lays out the details about pricing, investor rights, management expectations, and other key terms of the proposed deal. Though not legally binding, the term sheet is an important step in the process of raising private equity.
Key Takeaways
- The Term Sheet in Private Equity is a non-binding agreement that outlines the major aspects of an investment to be made by private equity. This includes the initial understanding about the investment size, the ownership stake to be received, the type of securities to be issued, and so on.
- A Term Sheet serves as a basis for preparing the definitive, legally binding documents. While the term sheet itself is often not legally binding, it can contain clauses that are, such as confidentiality and exclusivity clauses.
- Even though it is a preliminary step, a term sheet is critical because it sets the tone for the negotiations and structure of the deal. It’s important that all parties clearly understand the terms and conditions listed on it to prevent misunderstanding or conflict during the investment process.
Importance
The term sheet in private equity is of great significance because it serves as a preliminary agreement outlining the key terms and conditions under which an investment is to be made.
It acts as a blueprint for the proposed investment, outlining the basic elements such as the amount invested, ownership structure, the governance of the company post-investment, and investor rights such as liquidation preference, anti-dilution provisions, and exit rights.
This document streamlines the negotiation process between the parties involved, minimizes misunderstandings, and ultimately paves the way for a definitive agreement.
Thus, it plays a pivotal role in safeguarding the interests of all the parties involved and driving the investment process more efficiently.
Explanation
The term sheet in private equity serves as a critical document outlining the key terms and conditions governing an investment opportunity. It typically comes into play during the fundraising process or investment negotiations. It essentially provides a roadmap of the proposed deal and acts as the basis for more in-depth legal documents that are finalized later on.
The term sheet in private equity is not usually legally binding but serves as an agreement in principle between the private equity firm and the company it intends to invest in. The purpose of a term sheet is multifaceted. First, it sets out the basic terms and structure of the deal.
By outlining the important features such as the investment amount, the valuation of the company, the form of investment (equity or debt), exit strategy, etc., it lets all involved parties know what they are getting into. It also ensures that all parties are on the same page about the nature and expectations of the investment, therefore helping to mitigate risks and conflicts down the line. It’s used as a tool to facilitate and streamline the negotiation process, allowing any disagreements or misunderstandings to be ironed out before any legally binding contracts are written and signed.
Examples of Term Sheet in Private Equity
Uber’s Series G Funding Round: In February 2015, Uber raised $1 billion in PE funding, in a round led by The Goldman Sachs Group, Inc. The term sheet for this deal outlined Uber’s pre-money valuation to be approximately $40 billion, with a post-money valuation of around $41 billion. The term sheet also included clauses relating to investor rights, provisions for later funding rounds, and a provision that the company would remain private for the next couple of years.
Facebook’s Series D Funding: In January 2011, PE firm Goldman Sachs, along with Russia’s Digital Sky Technologies, invested $500 million in Facebook. The term sheet highlighted that Facebook’s pre-investment valuation was $50 billion and outlined the expectations of the investors regarding their returns on investment, and gave Goldman Sachs an exclusive position for further equity investments.
Silver Lake Partners’ Acquisition of Dell: In February 2013, computer manufacturer Dell was taken private by its founder, Michael Dell, and PE firm Silver Lake Partners in a deal worth $
4 billion. The terms of this buyout were outlined in a term sheet issued to the shareholders detailing the purchase price per share, financing arrangements, management structure post-buyout, indemnification provisions, and clauses for potential litigation.
FAQ Section: Term Sheet in Private Equity
What is a Term Sheet in Private Equity?
A Term Sheet is a non-binding document that illustrates the basic terms and conditions under which an investment is made. In Private Equity, it serves as a blueprint of the prospective deal between the investor and the company.
What does a Term Sheet typically include?
A typical Term Sheet includes details about the type of shares to be issued, the price per share, the manner in which the investment will be made, the company valuation, voting rights, anti-dilution provisions, and more. Some Term Sheets may also cover conditions for the exit of investors.
Is a Term Sheet legally binding?
Normally, a Term Sheet is not legally binding, except for certain provisions such as confidentiality and exclusivity agreements. The main objective of a Term Sheet is to provide a framework for further negotiations. Binding commitments are usually made later in the definitive agreements.
Why is a Term Sheet important in a Private Equity deal?
A Term Sheet is important in a Private Equity deal as it governs the relationship between the investor and the company. It forms the basis of more detailed, binding documents, and can save time, efforts, and potential disagreements during the negotiation process.
Who usually drafts the Term Sheet?
In most Private Equity deals, the investor or the one who proposes the deal usually drafts the Term Sheet.
Related Entrepreneurship Terms
- Valuation: Refers to the estimated worth of the company being bought out or invested in. A crucial part of any Term Sheet, affecting how much equity the investor will receive in return.
- Investment Amount: The total amount of funds that the private equity firm intends to invest in the target company. The exact amount is often specified in the Term Sheet.
- Due Diligence: The process carried out by private equity firms to verify information and assess potential risks and rewards associated with the investment. This process usually precedes the drafting of a Term Sheet.
- Exit Strategy: It represents the private equity firm’s plan to sell its stake in the company for a profit. Details of potential exit strategies are often cited in a Term Sheet.
- Equity Stake: Represents the percentage of the company’s total equity that will be sold to the private equity firm. This information forms an essential part of the Term Sheet.
Sources for More Information
- Investopedia: A comprehensive resource that provides users detail about “Term Sheet” in Private Equity, along with other financial and investment related information.
- Intralinks: An advanced platform that provides in-depth content on financial terms and trends, including Term Sheet in Private Equity.
- PE Hub: A resilient platform that offers information about the private market, including detailed articles discussing “Term Sheet” in private equity.
- Schulte Roth & Zabel LLP: A law firm known for its work in private investment sector. They provide various articles and reports on private equity terms, including “Term Sheets”.
