Definition (canonical)
A term sheet is the non-binding summary of the key terms of an investment — the negotiation blueprint that the binding legal documents will later encode. "Non-binding" deserves an asterisk: exclusivity and confidentiality clauses usually DO bind, and walking away from signed terms burns reputation in a small market.
Economics: who gets what money
Valuation (pre/post-money) sets the price — but three quieter terms move real outcomes as much: liquidation preference — who is paid first at exit and how much: 1× non-participating is the clean standard (investor takes their money back OR converts to their share, whichever is higher); participating preferred or multiples above 1× mean the investor eats twice — model exit scenarios before signing, because at modest exits aggressive preferences leave founders near zero despite headline ownership. Anti-dilution — protection if a later round prices lower: broad-based weighted average is standard; full-ratchet is a red flag. Option pool — investors typically demand it created PRE-money, i.e., from founders' side; negotiating pool size against a realistic hiring plan (not a generic 15%) recovers meaningful points of ownership.
Control: who decides what
Board composition — a 2-1-1 (founders-investor-independent) at seed keeps balance; ceding board control at early stages is rarely necessary and hardly reversible. Protective provisions — investor vetoes over key actions (new rounds, sale, debt, budgets): standard in scope, dangerous when overbroad. Founder vesting — yes, on your own shares: 4 years with a 1-year cliff protects co-founders from each other; negotiate credit for time served and acceleration on acquisition (single vs double trigger). Pro-rata and information rights — routine; drag-along — ensure thresholds are sane so a minority cannot force a fire sale.
Negotiating sanely
Leverage comes from alternatives, so run a process that produces two term sheets — everything else is commentary. Prioritize: clean 1× non-participating preference and board balance over an extra valuation point; a higher price wrapped in participating preferred is frequently the WORSE deal. Use standard documents as anchors; every exotic clause costs legal fees now and signalling later. And read the exclusivity clock: 30–45 days is normal, 90 is a leash. Due diligence follows signing — the term sheet is where your leverage peaks; after it, momentum works for the investor.
FAQ
Can I show one investor another's term sheet? Terms confidentiality usually forbids it — but "we have a competing term sheet" as a fact is fair game and moves markets.
What's usually missing that should be there? Founder salary post-round, ESOP refresh policy, and who pays legal costs — small lines, recurring fights.
SAFE/convertible vs priced term sheet? Early instruments defer these questions; the first priced round inherits them all at once — learn the terms before you need them.
Related: Venture Capital · Cap Table · Equity · Due Diligence Reviewed: 2026-07-16 · Sources: venture deal canon