Term Sheet

A term sheet is a non-binding document summarizing the key terms of an investment offer. Understanding it is crucial before you sign anything.

Definition

A term sheet is a non-binding document that outlines the key terms and conditions of a proposed investment. It serves as the basis for negotiation before binding legal documents (like a Shareholders' Agreement or Stock Purchase Agreement) are drafted.

While non-binding, signing a term sheet signals a serious commitment from both parties. Once signed, both sides typically stop talking to other parties about the same transaction.

Key Terms in a Term Sheet

Valuation: Pre-money and post-money. Determines what percentage the investor will own.

Investment amount: How much the investor is putting in.

Type of security: Equity (preferred stock) or convertible instrument (SAFE, convertible note).

Liquidation preference: How much investors get paid before common shareholders in an exit.

Anti-dilution provisions: Protections for investors in a down round. Broad-based weighted average is standard and fair.

Board composition: How many seats each party controls.

Protective provisions: Veto rights over specific decisions (issuing new shares, selling the company, etc.).

Pro-rata rights: The right to invest in future rounds to maintain ownership percentage.

Option pool: Often investors require a refresh of the option pool before the investment (pre-money), which dilutes founders more than the headline valuation suggests.

SAFE vs. Priced Round

Many early-stage investments use SAFEs (Simple Agreements for Future Equity) rather than priced rounds. A SAFE converts to equity at a future priced round, often with a valuation cap and/or discount.

SAFEs are simpler, faster, and cheaper to close than priced rounds, making them popular at the pre-seed and seed stages.

Getting Legal Advice

Always engage a startup-focused lawyer before signing a term sheet. The economic and control implications of the terms are significant and can affect you for years. Many lawyers offer fixed-fee startup packages.