If you’re just beginning the process of putting together a business plan for your initial public offering (or IPO), one of the first papers you’ll need to read is a term sheet for investors. A term sheet is essentially like a marriage between you and your investors, with much less open-end or romance than a conventional business plan. Rather, it describes who gets what, and how the terms of the deal are laid out.
The term sheet details the shareholders and the shares they own. In order to be registered as an investment corporation, you must have at least one common shareholder, who is the person that makes the invested funds whole. Common shareholders are corporations, LLCs, unincorporated organizations and anyone residing in the United States. A typical term sheet template will list the stock and common shareholders along with their address and contact information.
Your template will likely also have a blank common share certificate template. This template serves one purpose: it helps you quickly determine the quantity of common shares owned. You can calculate the maximum and minimum dividends, you can pay out based on your investment amount and determine if you are subject to paying capital gains tax. The template will also detail which tax bracket you fall into for the taxable year, as well as provide for quarterly dividends and capital gains distributions.
There are many other types of term sheets on the market. Some focus on real estate investments, others on alternative investments, while still others provide complete coverage for all types of businesses, including start-up firms and mature industries. Many of these templates describe terms in far greater detail than those found in general term sheets, especially pertaining to start-ups. The types of businesses and industries covered vary by provider, so it is important to shop around for the best price.
Another type of term sheet describes financial sponsors. This would be a particularly helpful document for entrepreneurs and new business owners, who could include investors from the company or their friends and family. Investors who participate in financing programs could include venture capitalists, private equity firms and wealthy individual supporters. Private placementitzes could also be used as a useful source of information to potential investors. These could include firms, joint ventures, venture capitals, insurance companies and large foundations.
There are many ways to prepare a term sheet to facilitate discussions with prospective funding sources. However, investors need to be certain they understand the terms set forth in the document, including any applicable taxes or regulations. This could include: the gross proceeds by which the investment was made, principal paid in and the interest rate over the term of the agreement, as well as the terms of the partnership or limited liability entity. Investors should keep this in mind when reviewing documents pertaining to their investment in order to avoid problems later.