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Term sheets are agreements that help to establish the foundation of a working relationship between two parties. While not considered to be binding in nature, the term sheet functions as a way of documenting the basics of the relationship, including the terms and conditions that will govern the activity that takes place between the two parties. A term sheet often is prepared and serves as the basis for negotiation before a more formal contract is drafted and adopted.
The use of a term sheet can be found in many different types of business relationships. Many companies will make use of this device when attempting to secure venture capital. Essentially, the term sheet will be prepared early in the discussions between the investor and the company, and define such terms as the amount to be invested, repayment terms, interest and dividends that are anticipated to be earned on the investment, and other key factors. Once both parties have come to terms on how the venture capital investment will work, they can proceed to draft a binding business agreement.
While not necessarily a formal or legally binding agreement, the term sheet is often considered to fall into the category of a good faith document. That is, both parties involved will assume the terms outlined in the term sheet represent the full intent of everyone concerned, and that there are no attempts to be vague or slip in any additional factors when it is time to draft the formal contract. As such, there is usually not anything contained in the contract that does not appear in the text of the term sheet, unless all parties agreed to the addendum during negotiations.
Along with venture capital investments, a term sheet can be employed in a number of other financial situations. These include the extension of loans between individuals, temporary transfers of title of property and other deals that involve some degree of responsibility on the part of everyone concerned.