Term Sheet
A non-binding document outlining the key terms of an investment, serving as the basis for negotiation before legal drafting.
A term sheet is a concise document (typically 3-8 pages) that outlines the proposed terms of an investment. While mostly non-binding, it establishes the framework for the definitive legal agreements that follow. Key terms include valuation, investment amount, liquidation preferences, board composition, protective provisions, anti-dilution protections, and investor rights.
Receiving a term sheet is a significant milestone, but it is not a closed deal. The period between signing a term sheet and closing the round (typically 4-8 weeks) involves legal drafting, due diligence, and sometimes renegotiation. Approximately 10-15% of signed term sheets never close, usually due to issues uncovered in due diligence.
Founders should focus on the economic terms (valuation, liquidation preference, participation) and control terms (board seats, protective provisions, drag-along rights). Many investors use standard templates like the NVCA model term sheet, which makes comparison easier. Having a lawyer experienced in venture financing review the term sheet before signing is essential, even though it is technically non-binding.
Example
A VC sends a term sheet proposing a $3M investment at a $12M pre-money valuation, 1x non-participating liquidation preference, one board seat for the investor, and standard protective provisions. The founder's lawyer negotiates to remove the participation rights and add a 10% unallocated option pool. Both sides sign the term sheet, and the lawyers begin drafting the definitive agreements.
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