What Is a Term Sheet?
A term sheet is a short document that sets out the main terms of a proposed investment, such as valuation, amount raised, liquidation preference, board composition, investor rights, and the option pool, before lawyers draft the final financing documents. Most of it is non-binding, but its terms usually carry straight into the definitive agreements.
The economic terms
Valuation and price per share. Usually stated as a pre-money valuation, from which the price per share is calculated using the fully diluted share count. Check what the fully diluted count includes, because it changes the effective price.
Amount raised. The size of the round and any allocation to the lead and other investors.
Option pool. Many term sheets require the option pool to be created or expanded before the investment, so the dilution falls on existing holders rather than new investors. This effectively lowers the pre-money valuation, so it should be negotiated alongside price.
Liquidation preference. How much investors receive before common stockholders in a sale or wind-down. A one times non-participating preference, where investors take the greater of their money back or their converted share, is the common market standard in many venture markets. Multiples above one times or participating preferences shift more of an exit to investors.
Anti-dilution protection. Adjusts investors' conversion price if the company later sells shares at a lower price. Broad-based weighted average protection is standard; full ratchet is far more severe for founders.
Dividends. Usually non-cumulative and paid only if declared, which makes them largely theoretical in venture deals. Cumulative dividends are a meaningful economic term if present.
Pay-to-play, redemption rights, and similar provisions appear less often and can materially change outcomes when they do.
The control terms
Board composition. How many seats the board has and who fills them: founders, investors, and independent directors. Board control determines who can hire and fire the CEO, approve budgets, and approve a sale.
Protective provisions. Actions that require the consent of preferred stockholders, such as issuing senior securities, changing the charter, selling the company, or taking on significant debt. These give investors vetoes over specific decisions regardless of board control.
Information rights. Financial statements and reports investors are entitled to receive.
Pro rata rights. The right to invest in future rounds to maintain ownership.
Drag-along rights. Require stockholders to vote for a sale approved by specified holders, preventing small holders from blocking an exit.
Right of first refusal and co-sale. Govern what happens when founders or other holders want to sell shares.
Founder vesting. Investors often require founders' shares to be subject to vesting, sometimes resetting part of what has already vested.
Voting agreements that fix how certain holders vote on board seats.
Negotiate control before price
A higher valuation paired with a board the founders do not control, broad protective provisions, or a heavy liquidation preference can leave founders worse off than a lower valuation with standard terms. Evaluate the whole package, and model outcomes under several exit values before comparing term sheets on price alone.
How a term sheet is used
Timing. A lead investor issues a term sheet after partner approval, once they want to invest. Founders may receive more than one and negotiate between them.
Binding and non-binding parts. The investment terms are usually non-binding, so either side can walk away before closing. Provisions such as confidentiality, exclusivity or no-shop, and governing law are typically binding.
Exclusivity. A no-shop clause prevents the company from soliciting other investors for a set period. Once signed, founder leverage drops, so negotiate substance before signing.
From term sheet to close. Lawyers draft the definitive documents, commonly a stock purchase agreement, amended charter, investors' rights agreement, voting agreement, and right of first refusal and co-sale agreement. Many are based on standard templates such as those published by the National Venture Capital Association. Diligence runs in parallel.
Renegotiation. Terms agreed at this stage almost always carry into the final documents. Attempts to change them later cost time and goodwill.
Get counsel before signing. An experienced startup lawyer can identify off-market terms, explain their practical effect, and negotiate efficiently.
This page is general information, not legal, tax, or investment advice. Terms and rules vary by jurisdiction and deal; get advice from counsel on a specific decision.
This is general information, not legal advice, and reading it does not create an attorney-client relationship. Talk to a qualified attorney about your specific situation.
Multiple term sheets
Receiving more than one term sheet improves leverage, but only until one is signed. Compare them on the full package, move quickly, and be transparent with investors about timing. Using one term sheet to pressure another is common; misrepresenting terms to do so damages relationships that last well beyond the round.
Frequently asked questions
- What is a term sheet?
- A short document summarising the main terms of a proposed investment, including valuation, amount, liquidation preference, board composition, investor rights, and option pool requirements, before lawyers draft the definitive financing documents. It sets the framework those final documents follow. It is issued by the lead investor once they decide to invest.
- Is a term sheet legally binding?
- Mostly not. The investment terms are usually non-binding, so either party can walk away before closing. Provisions such as confidentiality, exclusivity or no-shop, and governing law are typically binding, and exclusivity in particular reduces the company's leverage once signed. Read those clauses before signing.
- What are the most important terms in a term sheet?
- Valuation and the option pool together determine effective price. Liquidation preference and participation decide how exit proceeds are split. Board composition and protective provisions decide control. Anti-dilution, pro rata, and drag-along rights also matter, so evaluate the full package rather than price alone.
- What happens after a term sheet is signed?
- Lawyers draft the definitive documents, commonly a stock purchase agreement, amended charter, investors' rights agreement, voting agreement, and right of first refusal and co-sale agreement, while the investor completes diligence. The round closes when documents are signed and funds are transferred.