Term sheet
turm sheet
A non-binding document outlining the key terms of an investment, including valuation, board seats, and investor rights.
A term sheet is the document that outlines the key terms of a venture capital investment before the lawyers draft the final agreements. It covers valuation, round size, board composition, investor rights, liquidation preferences, anti-dilution protections, and other governance terms.
Term sheets are typically non-binding (except for confidentiality and exclusivity clauses). But once signed, the deal almost always closes because both sides have agreed on the major terms. The lawyers then spend 2-4 weeks turning the term sheet into definitive legal documents. Due diligence happens during this period.
The most important terms are valuation (how much of the company the investor gets), liquidation preference (who gets paid first in a sale), and board seats (who controls major decisions). Everything else is usually negotiable.
Examples
A startup receives its first term sheet.
The term sheet offers: $5M investment at $20M pre-money, 1x non-participating liquidation preference, one board seat for the investor, standard protective provisions, and a 10% option pool increase. The founders review it with their lawyer before signing.
A founder negotiates term sheet provisions.
The investor wants a 2x participating liquidation preference. The founder pushes back: that means the investor gets 2x their money back before anyone else, plus their pro-rata share of the remaining proceeds. They negotiate down to 1x non-participating.
Multiple term sheets create leverage.
The founder receives three term sheets in the same week. This competition lets them negotiate better terms: higher valuation, smaller option pool requirement, and fewer protective provisions. Having alternatives is the strongest negotiating position.
In practice
Read more on the blog
Frequently asked questions
Is a term sheet legally binding?
Mostly no. The economic and governance terms are non-binding. But confidentiality (you cannot share the term sheet) and exclusivity (you cannot negotiate with other investors for a set period, usually 30-60 days) are typically binding.
What is a liquidation preference?
It determines the payout order when the company is sold. A 1x non-participating preference means the investor gets their money back first, then everything else is split by ownership. A 1x participating preference means they get their money back first AND their pro-rata share of the remainder.
Related terms
The estimated worth of a company, determined during a funding round by negotiation between founders and investors.
The investigation process investors conduct before finalizing an investment to verify a company's financials, legal standing, and claims.
A spreadsheet or tool that tracks who owns what percentage of a company, including founders, investors, and employees with stock options.
A form of private equity financing where firms invest fund money in high-growth startups in exchange for equity.
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