Term Sheet
Definition
A term sheet is a non-binding document outlining the key financial and governance terms of a proposed investment, including valuation, investment amount, liquidation preferences, board composition, and protective provisions. It serves as the basis for negotiation before detailed legal documents are drafted.
Overview
A term sheet is the blueprint for a fundraising deal. While typically non-binding (except for confidentiality and exclusivity clauses), it establishes the core economic and control terms that will be formalized in definitive legal agreements. Receiving a term sheet is a strong signal of investor intent but is not a guarantee of funding.
Key economic terms include pre-money valuation, investment amount, option pool size, liquidation preference (typically 1× non-participating), and anti-dilution provisions (typically broad-based weighted average). Key control terms include board composition, protective provisions (investor veto rights), pro-rata rights (ability to invest in future rounds), and information rights.
Founders should focus their negotiation energy on the terms with lasting impact: valuation, board seats, liquidation preferences, and anti-dilution. Less impactful terms like information rights or registration rights are generally standard. Having experienced legal counsel review the term sheet is essential; seemingly minor clauses can have significant consequences in exit or downside scenarios.
Example
A term sheet proposes $3M investment at $12M pre-money valuation, 1× non-participating liquidation preference, a 10 % post-close option pool, and one investor board seat.
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