When it is still too early for Shareholders’ Agreement (SHA) or Share Subscription Agreement (SSA), many Malaysian SMEs turn to a term sheet before any investment is made or definitive legal documents signed.
A standard in initial stages of private equity fundraising, the term sheet acts as a filter and helps identify if there is sufficient alignment for the parties to proceed to definitive legal documentation.
Why use a term sheet
A term sheet is commonly used to record key commercial terms of a proposed investment and forms the early part of the overall legal process in a private placement because:
- not every interested investor will ultimately proceed
- founders and investors need clarity on key deal points before committing time and resources
More importantly, a properly structured term sheet sets the foundation for the subsequent legal documents and directly shapes how the investment is implemented. For this reason, it is recommended to engage specialised corporate lawyers to draft the term sheet.
Key terms
Investors usually focus on a few core commercial points below, which later form the basis of the definitive agreements such as the SHA, SSA and company constitution.
| Key Term | What It Covers |
| Investment amount / package | How much capital the investor will inject |
| Valuation | How the company is valued for this round |
| Equity stake | % of shares issued post-investment (more applicable if there is a fixed fundraise target) |
| Share class | Ordinary or preference shares |
| Board / control rights | Board seat, voting rights, or veto matters |
| Use of funds | How the investment proceeds will be used |
| Exit expectations | How investors may exit in the future (i.e., share sale, drag-along rights, tag-along rights, IPO, company sale) |
| Conditions precedent | Key conditions before completion |
Legal enforceability
As a general rule, most investment term sheets are not legally binding, which means:
- investors are usually not legally obliged to proceed with the investment
- either party may walk away before definitive agreements are signed
However, term sheets often state that certain provisions are expressly binding, such as confidentiality and governing law.
Founders should understand that signing a term sheet does not guarantee that funds will be injected or locked in unless and until the final agreements are executed.
Common misconceptions
Misconception #1: “We can offer different term sheets to different investors.”
This may create issues where investors are subscribing to the same class of shares.
Eventually, investors are usually required to be governed by a common SHA or aligned constitutional terms. Different commercial terms for the same share class can lead to inconsistencies and complications.
If different commercial terms apply, there should be corresponding different class of shares.
Misconception #2: “There’s no urgency once the term sheet is signed.”
Although term sheets are generally non-binding, investors may still withdraw before definitive agreements are completed.
Long delays in closing a fundraising round can affect investor confidence, and in some cases, funds received may need to be refunded if the transaction does not complete.
Let ELP assist with your investment arrangement
Founders planning a private equity investment round often benefit from legal guidance when structuring and reviewing their investment agreements, so if you are preparing to raise funds or are in discussions with potential investors, do reach out for a free initial consultation.
