What Is a Term Sheet?
A term sheet is a short, usually non-binding document that outlines the main terms of an investment, such as valuation, amount, and investor rights, before full contracts are drafted.
How it works
After an investor decides to back a company, they send a term sheet. It sets out the proposed deal in a page or a few pages, so both sides can agree on the big points before spending money on lawyers. Most of it is non-binding, but some clauses, such as confidentiality and exclusivity (a period during which you agree not to shop the deal), are often binding.
Common items include:
- Investment amount and pre-money valuation.
- Type of security, often preferred stock.
- Liquidation preference and dividends.
- Board composition and voting rights.
- Option pool size.
- Pro rata rights and anti-dilution protection.
Example
A term sheet might propose $2 million at an $8 million pre-money valuation, making post-money $10 million, with the investor owning 20 percent. It might add a 1x non-participating liquidation preference, a five-person board and a 45-day exclusivity period. The founder then negotiates the points that matter before signing.
Why founders care
The term sheet sets the shape of the final contracts, and it is much easier to negotiate before signing than after. Valuation draws attention, but control, preferences and the option pool can matter just as much. Have a startup lawyer read it before you sign anything, including parts that appear standard.
Common mistakes
- Fixating on valuation while ignoring liquidation preference and control.
- Signing exclusivity without understanding how long it lasts.
- Assuming non-binding means nothing is binding.
- Negotiating without a lawyer who has seen many such deals.
Frequently asked questions
What is a term sheet?
A term sheet is a brief summary of the proposed terms of an investment, including amount, valuation and investor rights. Most of it is non-binding and guides the drafting of the final legal agreements.
Is a term sheet legally binding?
Usually the economic and governance terms are not, but certain provisions such as confidentiality or exclusivity often are. Deals can also fall through after signing. A lawyer can tell you exactly which parts bind you.
Related terms
Go deeper
- How to Value a Startup: Methods for Pre-Revenue Companies GuideHow to value a startup before it has revenue: common methods, pre-money vs post-money, and a worked dilution example with round numbers you can follow.
- Startup Funding Stages: Pre-Seed to Series C Explained GuideStartup funding stages explained in plain English: pre-seed, seed and Series A, B and C, what each round is for, what investors expect and how rounds are sized.
- Startup Legal Checklist: What to Handle Early GuideStartup legal checklist for first-time founders: entity, founder agreements, IP, EIN, licenses, contracts and privacy. A starting point for an attorney talk.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.