PlayInfoBox

Home /Investing /What Is a Term Sheet? Understanding the Basic Clauses

What Is a Term Sheet? Understanding the Basic Clauses

Tap each term to understand the key clauses that typically appear in a startup term sheet.

What is a term sheet?

A term sheet summarizes the key terms an investor and founder have agreed on before signing a definitive investment contract. Aside from a few provisions (such as confidentiality or exclusivity), it is often not legally binding.

Investment amount and valuation

The term sheet specifies pre-money valuation (the company's value before the investment), post-money valuation (value after adding the investment), the investment amount, and the resulting ownership stake for the investor.

Preferred stock terms

This includes investor-protective provisions such as liquidation preference, which lets investors recover their money first if the company is liquidated or sold, and dividend preference.

Board composition

Clauses covering an investor's right to a board seat and voting rights on major decisions are included here, and they shape how future governance and decision-making will work.

Tag-along rights and right of first refusal

These clauses cover the right of investors to sell their shares alongside a founder or existing shareholder who is selling (tag-along), or to have the first opportunity to buy those shares (ROFR).

Exclusivity period

After signing a term sheet, both sides typically agree not to negotiate with other investors for a set period, usually somewhere between 30 and 60 days.

What to look at when you receive a term sheet

A term sheet forms the skeleton of the eventual investment contract. Even though its legal force may be limited, it sets the benchmark for later negotiations, so it's worth reviewing not just valuation and ownership percentage but also governance-affecting clauses like board composition and preferred stock terms. This article introduces general concepts and is not a substitute for professional legal or financial advice β€” have a qualified professional, such as a lawyer, review any real term sheet.

Understand your company's capital structure before raising

To make sense of a term sheet's valuation and ownership figures, it helps to first understand basic capital structure concepts, such as par value and total shares outstanding, before you start fundraising conversations.

Frequently Asked Questions

Does signing a term sheet finalize the deal?

In most cases a term sheet itself carries little or no binding force, aside from provisions like confidentiality or exclusivity. The investment is only finalized once the definitive investment contract is signed.

Can a founder negotiate the terms in a term sheet?

Yes β€” a term sheet is meant to be a starting point for negotiation, so items like valuation, board composition, and the scope of a right of first refusal can be adjusted through discussion between founder and investor.