A term sheet is a preliminary, typically non-binding document that sets out the principal terms of a proposed investment deal between a startup and investors. It covers key elements such as valuation, investment amount, share classes, board composition, and investor rights, forming the basis for negotiating the legally binding investment agreement.
A term sheet is the document that marks the transition from casual investor conversations to serious deal negotiations. It's a concise summary of the key terms an investor proposes when they want to invest in your company, typically running between two and ten pages depending on deal complexity.
Think of a term sheet as a blueprint for your investment deal. It outlines the major points both parties need to agree upon before lawyers draft the full investment agreement. The term sheet saves everyone time and money by ensuring alignment on critical issues before expensive legal work begins.
Most term sheets are presented by investors after they've completed initial due diligence and decided they want to proceed. Receiving a term sheet is a significant milestone in your fundraising journey, signalling genuine investor interest rather than exploratory discussions.
A term sheet typically covers several crucial areas that will shape your relationship with investors. The valuation section establishes your company's worth and determines how much equity investors receive for their money. This includes both the pre-money valuation (your company's value before investment) and post-money valuation (value after the investment is added).
The investment structure section specifies the type of securities being issued, usually preference shares with rights like liquidation preferences and anti-dilution provisions. These terms protect investors if things don't go according to plan.
Governance terms outline board of directors composition, voting rights, and what decisions require investor approval. You'll also see sections covering pre-emption rights, information rights, and founder vesting arrangements. Understanding each of these sections is essential before signing.
Most provisions in a term sheet are explicitly non-binding, meaning either party can walk away before signing the final investment documents. This gives both founders and investors flexibility to negotiate and refine terms without legal obligation.
However, certain clauses within a term sheet are typically binding. Exclusivity provisions (also called "no-shop" clauses) prevent you from negotiating with other investors for a specified period, usually 30 to 60 days. Confidentiality clauses requiring you to keep the term sheet contents private are also generally enforceable.
The non-binding nature of most term sheet provisions doesn't mean you should treat them casually. Walking away from a signed term sheet without good reason can damage your reputation in the investment community, where relationships and trust matter enormously for future fundraising.
Term sheet negotiations typically take between one and four weeks, depending on deal complexity and how aligned both parties are from the start. Simple seed investment rounds with standard terms can be agreed within days, whilst Series A funding negotiations with multiple investors often take longer.
The negotiation timeline depends heavily on your leverage. If multiple investors are competing to lead your round, you'll have more negotiating power and potentially faster resolution. If you're working with a single interested investor, expect more back-and-forth as they push for favourable terms.
Don't rush term sheet negotiations to close quickly. The terms you agree now will affect your company for years to come and carry through to future funding rounds. Taking an extra week to understand and negotiate better terms is almost always worthwhile.
After signing the term sheet, the real legal work begins. Lawyers for both sides draft the definitive agreements, including the investment agreement, shareholders' agreement, and updated company constitution. This documentation phase typically takes four to eight weeks.
Investors will conduct confirmatory due diligence during this period, verifying the information you've provided and examining your company's legal, financial, and operational details. Any significant discrepancies discovered could give investors grounds to renegotiate terms or withdraw.
The process concludes at "completion" when all documents are signed, funds transfer to your company bank account, and new shares are issued to investors. Only at this point does the investment become legally binding and final.
Pay close attention to liquidation preferences, which determine how sale proceeds are distributed. A 1x non-participating preference is standard and fair, but higher multiples or participating preferences can significantly reduce what founders receive in an exit, especially in modest outcomes.
Examine anti-dilution provisions carefully. Broad-based weighted average anti-dilution is founder-friendly, whilst full ratchet provisions can be punitive if you later raise at a lower valuation. These terms become critically important if your company hits difficult times.
Watch for excessive control provisions that require investor approval for routine business decisions. Whilst investors reasonably want approval rights over major matters like selling the company or raising more money, overly restrictive controls can hamper your ability to run the business effectively day-to-day.
