It is customary to begin the negotiation of a venture capital investment with the circulation of a document known as a "term sheet," a summary of the terms the proposer (the issuer, the investor, or an intermediary) is prepared to accept. The term sheet is also known as to a letter of intent, LOI, a nonbinding outline of the principal points which the formal legal documents—(assuming a financing closes)—the Stock Purchase Agreement and related agreements will cover in detail.
The advantage of the abbreviated term sheet format is, first, that it expedites the process and guides future drafting Experienced legal counsel immediately know generally what is meant when the term sheet specifies "one demand registration at the issuer's expense, unlimited piggybacks at the issuer's expense, weighted average antidilution"; it saves time not to have to spell out the long-form edition of those references. Second, since the term sheet does not purport to be an agreement of any sort, it is less likely that a court will find unexpected promissory content. Some portions of a term sheet typically have binding effect, of course, if and to the extent an interlocutory memorialization is needed of some binding promises, that is, confidentiality of the disclosures made in the negotiation. The summary format of a term sheet, however, makes it less likely that any party will be misled into thinking that some form of enforceable agreement has been memorialized when it has not.