The short answer
A term sheet summarizes the key terms of a financing on one to a few pages before the actual contract is written. In most points it is not binding, but it sets what will no longer be fundamentally negotiated later. As a founder, you should above all understand valuation, liquidation preference, anti-dilution protection, control rights and vesting.
What a term sheet is and is not
The term sheet is a declaration of intent by the investor. It states the amount, the valuation and the key points of the investment. Usually only a few parts are binding, such as confidentiality and an exclusivity period during which you may not negotiate with other investors. Everything else only becomes binding in the investment agreement and the shareholders' agreement. Have a lawyer who specializes in corporate law support you. This article is not legal advice.
The most important clauses
Valuation and investment amount
This states how much money flows and at what pre-money valuation. Together they determine the share the investor receives. How a valuation is derived depends on the stage of the company, for example through the VC method or a revenue multiple. Check whether an employee option pool is already included in the valuation before the investment. That reduces the value for existing shareholders.
Liquidation preference
It determines who gets money first in a sale or liquidation. With a simple preference, the investor first gets their invested capital back before the rest is distributed. More critical are variants where the investor also participates proportionally in the rest or receives a multiple of their investment.
Anti-dilution protection
It protects the investor if shares are later issued at a lower valuation. The broader the clause, the more you as a founder bear the consequences of a difficult follow-on round.
Vesting
Your shares are often "earned" gradually over several years. If you leave the company early, part of them lapses. Clarify the term, the cliff and what happens in a sale.
Control and veto rights
Investors often require seats on an advisory or supervisory board and approval rights for important decisions, such as new funding rounds, sales or budgets. Check how far the list goes and whether it slows your day-to-day business.
Tag-along and drag-along rights
With a tag-along clause, investors can sell along when you sell. With a drag-along clause, majority shareholders can oblige others to sell. Both are common; the thresholds are what matter.
Information rights
Investors regularly receive reports, such as monthly figures and annual accounts. For this to work without great effort, you need clean reporting.
Exclusivity
Usually you commit for a few weeks to negotiate only with this investor. The period should match the duration of the review, not exceed it.
Typical founder mistakes
- Looking only at valuation: a high number with a harsh liquidation preference can be worse than a lower one with fair terms.
- No competing offers: without a second offer, there is no room to negotiate.
- Signing without a lawyer: even non-binding parts shape the later contract.
- Overlooking effects on later rounds: clauses carry through every further financing.
How to prepare
Work out what the terms mean for you at different sale prices. With a financial model you can see how dilution and preferences affect your proceeds. How we support founders in funding rounds is described on our fundraising page.
Frequently asked questions
Is a term sheet legally binding?
As a rule only in individual parts, such as confidentiality and exclusivity. The remaining terms only become binding in the investment agreement.
How long does it take from term sheet to closing?
Usually a few weeks to a few months, depending on due diligence and contract negotiation.
What is the most important clause in a term sheet?
That depends on the situation. Besides valuation, liquidation preference, anti-dilution protection and veto rights are particularly impactful.
Do I need a lawyer for a term sheet?
It is strongly recommended. An experienced lawyer spots unusual clauses and helps negotiate them.
