A term sheet is a short, mostly non-binding document that summarizes the key economic and control terms of a proposed VC investment. It is the negotiated roadmap for what will later become binding definitive documents (Stock Purchase Agreement, Investor Rights Agreement, etc.).

What a term sheet is (and is not)

It is:

• A structured summary of the deal’s economics (valuation, check size, option pool).
• A summary of control and governance (board, protective provisions, voting).
• A statement of preferred stock rights (liquidation preference, anti-dilution, pro-rata, redemption).

It is not:

• A binding contract (except for specific clauses like confidentiality and exclusivity).
• The final deal — definitive docs can expand terms.
• A guarantee of closing — diligence can still surface deal-breakers.

The sections of a standard term sheet

1. Economics

• Amount: Total round size and each investor’s commitment.
• Pre-money valuation: Company value before the investment.
• Post-money valuation: Pre-money + investment.
• Price per share: Derived from pre-money / fully diluted shares.
• Option pool: New option pool usually sized pre-money, which dilutes founders not investors.

2. Preferred stock rights

• Liquidation preference: Usually 1x non-participating. Investor gets their money back before common shareholders, then converts to common.
• Participation: “Participating” means investor gets their preference and shares pro-rata in remaining proceeds — founder-unfriendly.
• Anti-dilution: Broad-based weighted average is standard; full ratchet is founder-hostile.
• Dividends: Usually non-cumulative; mostly symbolic at early stages.

3. Governance and control

• Board of Directors: Classic Series A: 2 founders, 2 investors, 1 independent.
• Protective provisions: Preferred-class veto rights on major actions (sale, new securities, option pool expansion, etc.).
• Voting rights: Usually one vote per share on an as-converted basis.

4. Investor rights

• Pro-rata right: Right to participate in future rounds to maintain ownership.
• Right of first refusal (ROFR): Company or investors have first right to buy shares founders want to sell.
• Co-sale / tag-along: Investors can participate alongside founder share sales.
• Drag-along: Majority can force minority to join a sale.
• Information rights: Financials and reporting cadence.
• Registration rights: IPO-related rights.

5. Founder terms

• Vesting: Standard is 4 years with a 1-year cliff.
• Acceleration: Single-trigger vs double-trigger on acquisition.
• Non-compete / non-solicit: Often included.
• IP assignment: Must be clean.

6. Closing conditions

• Exclusivity (“no-shop”): Usually 30–60 days; this clause is usually binding.
• Confidentiality: Always binding.
• Expense reimbursement: Company typically pays investor legal fees up to a cap.

Terms to negotiate first (if you only have leverage for 3)

1. Valuation + option pool sizing — they’re inseparable.
2. Liquidation preference structure — 1x non-participating is the norm for a reason.
3. Board composition + protective provisions — you can lose control faster than you think.

Practical takeaway

1. Founders: Hire an experienced startup lawyer. Do not negotiate alone.
2. Angels and first-time investors: If you’re inheriting a term sheet from a lead, read it carefully — your rights may differ from the lead’s.
3. Operators: Build a mental model of each term’s mechanical effect at exit before signing.

Further reading

• NVCA model legal documents: https://nvca.org/model-legal-documents/