TL;DR: A term sheet is a non-binding document that outlines the key terms and conditions of a proposed financing deal. It is the starting point for negotiation, not the final agreement, but it sets the structure, pricing, and protections that the full legal documents will formalise.
A term sheet summarises the commercial terms of a financing transaction: how much capital, at what price, under what conditions, and with what protections for each party. Once both sides sign a term sheet, lawyers draft the binding legal agreements (loan agreement, warrant certificate, security documents) based on its terms.
Term sheets are used in both equity and debt financing. The specific terms differ significantly between the two.
While every lender's term sheet varies, venture debt term sheets commonly cover:
Is a term sheet a binding contract? Generally no, except for specific provisions such as exclusivity and confidentiality. The binding agreement comes later in the form of a loan agreement and related legal documents.
How long does it take to go from term sheet to close? For venture debt, the process typically takes a few weeks after term sheet signing, depending on the complexity of the legal documents and the pace of diligence. Companies that are better prepared for diligence with materials prepared in advance will tend to complete diligence faster.
Can terms change between term sheet and close? Yes, though material changes are uncommon once a term sheet is signed in good faith. Diligence findings occasionally affect specific terms.
What is a deposit at signing? Almost all lenders require a deposit at term sheet signing to fund third-party diligence costs (primarily legal). The deposit is applied to the setup fee at close. If the lender declines to proceed, it is returned less actual costs incurred.
Related terms: Venture Debt · Warrant · Exercise Price · Dilution · Covenant
