Deal Terms
What is a term sheet?
Quick Answer
A term sheet is a non-binding document that outlines the key terms and conditions of a proposed investment, including valuation, investment amount, board seats, liquidation preferences, and protective provisions.
Detailed Answer
A term sheet is the blueprint for a venture capital investment. While generally non-binding (except for exclusivity and confidentiality clauses), it establishes the framework that the final legal documents will follow.
Key sections of a VC term sheet:
**Economic Terms:** - Pre-money valuation and investment amount - Type of security (preferred stock) - Liquidation preference (1x non-participating is standard) - Anti-dilution protection (broad-based weighted average is standard) - Dividends (if any)
**Control Terms:** - Board composition and seats - Protective provisions (veto rights on key decisions) - Drag-along and tag-along rights - Information rights
**Other Terms:** - Employee option pool (typically 10-20%) - Vesting schedules (4-year with 1-year cliff is standard) - Right of first refusal and co-sale - No-shop / exclusivity period (30-60 days)
Founders should negotiate economic terms (valuation, liquidation preference) carefully, as control terms are relatively standardized. Getting a term sheet typically takes 2-4 weeks of diligence after partner meeting approval.
Related Questions
What is a SAFE (Simple Agreement for Future Equity)?
A SAFE is an investment contract created by Y Combinator where an investor provides capital to a startup in exchange for the right to receive equity in a future priced round, with terms like a valuation cap and/or discount rate.
What is a liquidation preference?
A liquidation preference gives preferred shareholders (investors) the right to receive their investment back before common shareholders in an exit. The standard is 1x non-participating, meaning investors get back their investment amount or convert to common stock — whichever is higher.
What is a convertible note?
A convertible note is a short-term debt instrument that converts into equity at the next priced round, typically with a valuation cap, discount rate, interest rate (2-8%), and maturity date (12-24 months).
What is anti-dilution protection?
Anti-dilution protection adjusts an investor's conversion price downward if the company raises a future round at a lower valuation (down round). The standard type is broad-based weighted average, which partially protects investors while limiting founder dilution.