What is a term sheet in venture capital?

A term sheet is the starting document in a venture capital investment. It's typically 5-15 pages long and summarizes the key economic and governance terms of the proposed deal: how much the investor is putting in, at what valuation, what type of security they'll receive, and what rights they'll have. While term sheets are usually explicitly non-binding (except for provisions like exclusivity and confidentiality), they set the framework for the definitive agreements that follow — which makes them critically important.

The economic terms in a term sheet typically include the investment amount, the pre-money valuation (what the company is worth before the money comes in), the post-money valuation (after the investment), the resulting ownership percentage, and the type of security (usually preferred stock). These are the numbers that determine how much founders get diluted and what return the investor needs for the deal to be profitable.

The governance terms cover things like board composition (how many seats, who controls the board), protective provisions (specific actions the company can't take without investor approval, like selling the company or issuing new shares), and information rights (what financials and reports investors receive and when).

Investor protection terms include liquidation preferences (whether investors get their money back first in a sale), anti-dilution provisions (what happens to investor ownership if the company raises money at a lower valuation later), and pro-rata rights (the right to invest in future rounds to maintain ownership percentage).

When a VC sends a term sheet, it's a significant signal — they've decided they want to invest. But the specific terms matter enormously. A $10M investment at a $30M pre-money valuation is very different from $10M at a $40M pre-money. And protective provisions that seem minor in good times can become very significant in a down round or challenging exit scenario. Founders should engage a startup-experienced lawyer before signing any term sheet.