Deal Terms & Term Sheets
What is a term sheet in venture capital?
A term sheet is a non-binding document outlining the key terms and conditions of a proposed investment, serving as the basis for negotiating a final deal.
A term sheet is essentially a letter of intent between a startup and a venture capital firm. It lays out the major economic and governance terms of a proposed investment before the lawyers draft the full legal documents.
Term sheets are typically non-binding — meaning neither party is legally obligated to close the deal — but they do create a moral commitment and signal serious intent. Walking away after signing a term sheet damages a VC's reputation.
Key economic terms typically covered include: the pre-money valuation, the amount being invested, the type of security (almost always preferred stock), liquidation preferences, and anti-dilution provisions.
Key governance terms include: board composition, voting rights, information rights, and pro-rata rights for follow-on investment.
Other common provisions: a no-shop clause (the startup agrees not to solicit other term sheets for 30–60 days), an exclusivity period, and conditions to closing.
Receiving a term sheet is exciting, but the negotiation of its terms matters enormously. A founder-friendly term sheet with a fair liquidation preference and limited protective provisions is very different from an investor-heavy term sheet with aggressive anti-dilution and full-ratchet provisions.
Related glossary terms
Related questions
What is a liquidation preference?
A liquidation preference gives investors the right to receive their money back before common stockholders (founders and employees) get paid in any sale or liquidation of the company.
What are pro-rata rights in venture capital?
Pro-rata rights give existing investors the right to maintain their ownership percentage in future funding rounds by investing their proportional share of new capital.
What is anti-dilution protection in venture capital?
Anti-dilution protection adjusts an investor's share price downward if the company later raises money at a lower valuation, protecting the investor from being diluted by a down round.