What Is a Term Sheet? How Investors Should Read One

A term sheet is a short document setting out the main terms of a funding deal before the full agreement is drafted. It is usually not legally binding in its entirety, but it is the basis of the discussion: what is agreed, how much, and on what conditions. For an investor, the term sheet is the first place to make sure nothing important is missed.

What does a term sheet contain?

• The parties: who the fund owner is, who receives the funds and who manages the transaction.
• Amount and structure: the funding amount and its form, for example equity with a profit share or another form.
• Use of funds: what the money is used for and the milestone to be reached.
• Timeframe: the expected length of the placement and the expected completion date.
• Profit sharing: how profit is calculated and divided, and the fees that apply.
• Reporting rights and duties: what information the investor receives and how often.
• Closing and delay conditions: what happens if the milestone is reached, delayed or not reached.

Key terms that often appear

Milestone is the specific event the funding is based on, such as a receivable clearing or a permit being issued. Profit share is the division of profit by an agreed percentage. Tenor is the length of the placement. Service fee is the platform's compensation; at Melton Bridge it is 20% and is charged only on profit earned by the investor. The basic concepts are covered in what is bridge financing and how it works.

Points an investor must check

• Is the milestone defined specifically enough that it is clear whether it was reached?
• Are the profit and fee calculations clear, including what happens if there is no profit?
• Are there provisions on delay, and who decides?
• Are the schedule and form of reporting written down?
• Is there a limit per transaction that lets you spread risk?

Warning signs

Be careful if terms are undefined, if a return is stated as a fixed figure without explaining where it comes from, or if you are asked to decide very quickly with no chance to review documents. A serious platform gives enough time and information to review.

A term sheet is not the end of the process

After the term sheet is agreed, a full agreement usually follows and needs careful reading, with your legal adviser if necessary. An example of a transaction from application to completion is in the bridge financing transaction case study, and how to turn the profit-share structure into numbers is in how to calculate ROI on profit-sharing investments.

This article is general education, not legal advice. To see how the process at Melton Bridge runs from mandate to diligence pack, visit the How It Works or Fund Owners page.