From investors to freelance graphic designers, it takes all kinds of people to get a small business off the ground. For obvious reasons, such as avoiding misunderstandings and getting sued, the terms of your business arrangements should be very clear, and that’s where term sheets come in. In a nutshell, a term sheet is a springboard for a legal and binding contract. It’s usually a non-binding list of bullet points, and the person who drafts it — maybe you — might use abbreviations to keep things simple.
Term sheets are a versatile documents, but startups use them the most to lay out terms when working with venture capitalists. In such a case, you’d use a term sheet to create a list of conditions — without the legal prose and legal document formatting — concerning your business’s finances. The document might spell out specifics such as how much your company’s worth, ownership shares, distribution of stock, corporate governance, and the distribution of business assets should your company shut down. What you end up with is an easy-to-follow list that lays out your rights as the business owner or founder and those of your investors, and that’s the basis of your contract.
You can also use a term sheet when working with independent contractors. Here, a term sheet spells out specifics such as pay, job roles and requirements, and ownership of the finished work. It might also specify the tools and equipment to be used and which party — you or the contractor — is supposed to provide them. Some people call a term sheet used for this purpose an independent contractor agreement.
Once you have the terms of your business arrangement listed on a term sheet, your lawyer can use it to draw up a final and legally binding agreement that you and the parties to the arrangement would sign.