Term Sheet

What Is a Term Sheet?

A term sheet is a non-binding document that outlines the key terms and conditions of a proposed investment deal between a startup and an investor. It is typically prepared by the lead investor and presented to the founder after initial interest has been established. While the term sheet itself is not legally binding in most of its clauses, it serves as the critical blueprint from which all final legal agreements — including the Stock Purchase Agreement (SPA), Investor Rights Agreement, and Voting Agreement — are drafted.

Think of a term sheet as a Letter of Intent for your equity deal. It captures the commercial terms both parties agree on before spending time and money on legal documentation.

Why Term Sheets Matter

For founders, a term sheet is far more than a formality. The terms you agree to at this stage — particularly around valuation, dilution, control, and exit economics — will follow your company for years. A poorly negotiated term sheet can result in founders losing board control, suffering heavy dilution in down rounds, or receiving very little from an acquisition that looks good on paper.

In many venture deals, founders typically see around 20% dilution per priced round, with lead investors often targeting 10–15% ownership at Seed and 15–25% at Series A. Understanding these benchmarks before you negotiate is essential.

Key Components of a Term Sheet

Valuation and Investment Amount The most visible part of the term sheet is the pre-money valuation and the amount being invested. These two numbers together determine what percentage of your company the investor receives. A $1M investment on a $9M pre-money valuation results in a 10% post-money ownership for the investor.

Type of Security Most VC investments use convertible preferred shares. These shares convert to common shares at an IPO or acquisition and carry special rights not available to common shareholders. Understanding the difference between participating and non-participating preferred is critical — participating preferred lets investors double-dip, taking their liquidation preference and then sharing in the remaining proceeds.

Liquidation Preference This determines the order and amount investors receive in a liquidity event. A 1x non-participating liquidation preference — now standard in 98% of venture rounds as of Q2 2025 — means the investor gets their money back first, but does not participate further if they convert to common. Aggressive investors may push for 2x or participating preferences, which dramatically reduce founder proceeds in moderate-exit scenarios.

Anti-Dilution Provisions Anti-dilution clauses protect investors if you raise money at a lower valuation in the future (a down round). Broad-based weighted average anti-dilution is the most founder-friendly standard form. Full ratchet anti-dilution — which adjusts investor ownership as if they invested at the lower price — is extremely punitive and should be resisted.

Governance and Control Rights The term sheet will specify board composition, voting rights, and investor veto rights (also called protective provisions). Over 90% of venture rounds maintain investor veto rights on major decisions such as selling the company, issuing new shares, or taking on significant debt. Founders must carefully review which decisions require investor consent.

Option Pool Investors typically require an employee option pool of 10–20% to be established before their investment, which dilutes existing shareholders rather than the incoming investor. This is a key negotiation point — pushing the option pool creation to post-money rather than pre-money can save founders several percentage points of ownership.

No-Shop Clause Most term sheets include an exclusivity (no-shop) clause preventing the startup from soliciting other investors for 30–60 days after signing. This is typically binding even when the rest of the term sheet is not. Be cautious about signing a no-shop before you are genuinely committed to the investor.

Founder-Friendly vs Investor-Friendly Terms

A founder-friendly term sheet typically features: 1x non-participating liquidation preference, broad-based weighted average anti-dilution, a balanced board (e.g. 2 founders, 1 investor, 2 independents), minimal protective provisions, and a reasonable option pool size created after investment.

Red flags to watch for include: participating preferred shares, full ratchet anti-dilution, investor majority board control, overly broad protective provisions, and pre-money option pool creation at an inflated size.

Negotiation Strategy

The best leverage you have when negotiating a term sheet is competition. Engaging multiple investors simultaneously creates a competitive environment and gives you data on market-standard terms. Always involve a startup-experienced lawyer before signing. A lawyer who understands venture transactions will often save you far more in equity value than they cost in fees.

Prioritise negotiation on: board composition, liquidation preferences, anti-dilution provisions, option pool sizing and timing. Accept standard market terms on less critical clauses to maintain goodwill with your investor.