A term sheet is a pre-contractual document that summarizes the key terms of a planned investment or transaction in a concise, clear form. It is often used in startup financing, corporate acquisitions and other complex business transactions. The term sheet serves as the basis for drafting the final, legally binding contracts.

Legal classification

In Germany, a term sheet generally has no direct legal binding effect unless this is expressly agreed. It is regarded as a kind of letter of intent. Nevertheless, under certain circumstances it can lead to pre-contractual liability claims, particularly if a party has already incurred expenses in reliance on the term sheet.

Typical contents of a term sheet

1. valuation and investment amount: In the case of start-up financing, the pre- and post-money valuation as well as the investment amount.
2. capitalization: overview of the share structure before and after the investment.
3. liquidation preference: privileges of certain investors in the event of an exit.
4. protection against dilution: regulations to protect against dilution in future financing rounds.
5. control and co-determination rights: e.g. seat on the supervisory board or veto rights on important decisions.
6. vesting regulations: Especially for founders and key employees.
7. information rights: scope and type of information that investors receive.
8. exit regulations: Provisions in the event of a company sale or IPO.
9. non-competition and confidentiality agreements.
10. milestones and conditions for further financing rounds.

Significance in practice

The term sheet plays a central role in the negotiation process. It helps to reach agreement on the key points of a transaction at an early stage and to identify potential stumbling blocks. For start-ups, it is often the first step towards securing financing and can serve as a basis for negotiations with other potential investors.

Challenges and risks

1. complexity: Despite their brevity, term sheets can contain complex legal and financial concepts.
2. binding nature: The boundary between a non-binding declaration of intent and a binding agreement can be blurred.
3. negotiation tactics: The initial formulation of the term sheet can have a strong influence on the rest of the negotiation.
4. completeness: Important details could be overlooked, which can lead to problems when drawing up the contract later.

Special features in the German legal area

In the German legal context, particular attention must be paid to this:

1. company law: term sheets must be compatible with the provisions of German company law, particularly in the case of GmbHs.
2. notarization: Certain agreements, such as the transfer of GmbH shares, require notarization.
3. Employee rights: Vesting provisions must be compatible with German employment law.
4. Tax aspects: The tax implications of certain structures should be considered at an early stage.

Conclusion

The term sheet is an indispensable tool in the modern business world, especially in the area of start-up financing and M&A transactions. It enables negotiations to be conducted efficiently and creates a solid basis for the detailed drafting of contracts. Despite being legally non-binding, the term sheet should be prepared with great care, as it sets the framework for the entire transaction. For companies and investors in Germany, it is important to take into account the special features of German law and, if necessary, to seek expert legal advice to ensure that the term sheet is drafted in the best possible way.