Deal Terms
Term Sheet
A non-binding document outlining the key terms of a proposed investment, including valuation, investment amount, and investor rights. The starting point for negotiating a financing round.
A term sheet is a non-binding letter of intent that summarizes the key economic and governance terms of a proposed investment. It is the starting point for negotiating a financing round before definitive legal documents are drafted.
For a VC round, a term sheet typically covers: pre-money valuation, investment amount, share class (preferred stock), liquidation preference, anti-dilution provisions, board composition, voting rights, protective provisions, pro-rata rights, information rights, and any special conditions (ESOP expansion, key employee requirements).
While term sheets are non-binding on the investment itself, certain provisions — like exclusivity (no-shop) clauses — are binding. The no-shop period (typically 30–60 days) prevents the company from soliciting competing offers while the lead investor completes due diligence.
In Practice
A Series A lead investor issues a term sheet offering $8M at a $25M pre-money valuation ($33M post-money), with 1x non-participating liquidation preference, broad-based weighted average anti-dilution, a 10% ESOP pool (pre-money), two board seats (lead investor + independent), standard pro-rata rights, and a 45-day exclusivity period. The founder reviews each term against market standards before signing and entering due diligence.
Why It Matters
The term sheet defines the economics and power structure of your relationship with investors for years. Founders should understand every term, not just valuation and check size. A low valuation with founder-friendly governance terms is often better than a high valuation with aggressive investor protections. Always negotiate the term sheet before signing — after exclusivity is granted, your leverage disappears.
VC Beast Take
Experienced founders know that valuation is just one term — governance terms matter enormously. A drag-along provision without founder consent, full ratchet anti-dilution, or participating preferred liquidation can cost founders millions at exit. Most VCs use standard market terms, but outliers exist. Have a lawyer who does VC work review every term sheet, especially your first.