Term sheets: what you agree to before the lawyers start.
A term sheet is a short summary of the deal a lead investor wants to do. It is mostly non-binding, but almost everything in it ends up in the final documents.
The short answer
A term sheet sets price, round size, option pool, liquidation preference, board, investor rights and protective provisions. Only a few clauses usually bind you, such as confidentiality and a no-shop period. Negotiate hard here; reopening terms later is much harder.
How it works
Receive the term sheet
The lead sends a few pages covering economics and control. Read it with your lawyer the same day.
Negotiate and sign
Settle valuation, pool, preference and board. Signing usually starts a no-shop period.
Confirmatory diligence
The investor checks legal, financial and IP records against what you told them.
Definitive documents
Lawyers turn the term sheet into the stock purchase, charter and investor rights documents.
Close
Documents are signed, the charter is filed and the money arrives.
Compare the options
What they decide
Economic terms: Who gets how much money
Control terms: Who gets to decide what
Main items
Economic terms: Valuation, pool, liquidation preference
Control terms: Board seats, protective provisions, voting
Also includes
Economic terms: Anti-dilution, dividends
Control terms: Information rights, drag-along
Binding at signing
Economic terms: No
Control terms: No
What actually binds you
Most of a term sheet is non-binding. The usual exceptions are confidentiality, a no-shop or exclusivity period, and sometimes who pays legal fees. The no-shop stops you talking to other investors for a set time, so sign only when you are confident in the lead.
Terms worth your attention
Price gets the attention, but structure often matters more. A 1x non-participating liquidation preference is the common default. Broad-based weighted average anti-dilution is the common, founder-friendlier form. A larger option pool in the pre-money quietly lowers your real valuation.
- Is the valuation pre-money or post-money, and what pool is included?
- Is the liquidation preference 1x non-participating?
- How is the board composed after closing?
- How long is the no-shop, and what fees do I cover?
Terms to know
No-shop
A binding period where you agree not to seek other investors.
Protective provisions
Decisions that need preferred investors' approval.
Anti-dilution
Adjusts an investor's conversion price if a later round is priced lower.
Is your deck strong enough to get to a term sheet?
A lead decides to send terms after the pitch, not before. Upload your deck and we tell you which slides weaken your case.
Questions founders ask
Can an investor back out after signing?
Yes. The economic terms are non-binding, so a deal can still fall apart in diligence. It is uncommon with a reputable lead, but it happens.
Do I need a lawyer for a term sheet?
Yes. Use a startup lawyer who negotiates venture deals regularly. Small wording changes here carry into every later round.
Sources
Sources: industry model venture financing documents; standard US practice. Not legal advice.
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