Term Sheet
A non-binding agreement outlining the key terms of a venture capital investment.
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Definition
A term sheet is a non-binding document that outlines the key terms and conditions of a venture capital investment. It serves as the basis for negotiation between founders and investors before formal legal documents are drafted.
Key term sheet provisions include: valuation (pre-money), investment amount, liquidation preference (1x non-participating is standard), board composition, anti-dilution protection, pro-rata rights, drag-along/tag-along rights, information rights, and founder vesting.
While term sheets are non-binding (except for exclusivity and confidentiality clauses), they set the negotiating framework. Once a term sheet is signed, the deal proceeds to due diligence and definitive document drafting, which typically takes 4-8 weeks.
Why It Matters for Founders
The term sheet is where the economic and governance terms of your investment are established. These terms affect your control, economics, and flexibility for years to come. Understanding each provision and its implications is essential for founders.
The most important terms are valuation, liquidation preference, and board composition. Accepting unfavorable terms at one round can create cascading problems in future rounds. Founders should seek legal counsel experienced in venture deals before signing.
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Real-World Example
A term sheet might specify: $15M investment, $55M pre-money valuation, 1x participating preferred liquidation preference, one board seat, and pro-rata rights for future rounds.
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