VC & PE Glossary
What Is Term Sheet?
Updated
Definition
A term sheet is a non-binding summary of the key economic and control terms proposed for a venture investment — valuation, amount, ownership, board rights, and major protections — signed before full legal docs.
Useful for: Founders, Investors
A term sheet is the preliminary agreement outlining the principal terms of a venture financing — the roadmap lawyers use to draft definitive investment documents.
How it works
Standard sections include company name and investor, security type (preferred stock, SAFE, note), pre-money valuation and round size, option pool increase, liquidation preference, anti-dilution, dividend rights, board seats, information rights, pro rata rights, drag-along, and exclusivity/no-shop period. Most economic terms are non-binding in US practice; confidentiality and exclusivity are often binding.
Founders compare multiple term sheets when lucky — evaluating partner fit, valuation, and structure, not just the highest price. Term negotiation follows issuance; diligence runs in parallel with exclusivity. Signed term sheets rarely re-trade unless diligence uncovers material issues.
Convertible instruments use simpler sheets: discount, valuation cap, MFN, and pro rata. Priced rounds use full NVCA-style templates adapted by counsel.
Why it matters
- Founders: Signing exclusivity locks you out of other investors for weeks. Understand what you are giving up before signing.
- Investors: The term sheet encodes governance expectations. Aggressive terms may win the deal but damage founder trust through the partnership.
Common mistake
Assuming “standard” language is harmless without lawyer review. Participating preferred, cumulative dividends, and full ratchet anti-dilution appear in “market” sheets in downturns and devastate common on moderate exits.
Related ideas
See also term negotiation, valuation cap, toxic term sheet, and liquidation preference.
Related terms
- Term Negotiation — Term negotiation is the back-and-forth between founders and investors over economic and control provisions in a term sheet — valuation, ownership, preferences, board seats, and protective provisions — before definitive documents are drafted.
- Toxic Term Sheet — A toxic term sheet is a venture offer whose economic or control terms disproportionately harm founders and common shareholders — often through aggressive liquidation preferences, anti-dilution, or punitive governance.
- Valuation Cap — A valuation cap is a ceiling on the price at which a convertible instrument — typically a SAFE or convertible note — converts into equity in a future priced round.
Common questions
Short answers for founders, LPs, and operators