Get an offer from an investor, and it often first comes in the form of a term sheet — a short document that sets the framework for an upcoming investment, before the heavier legal agreements get negotiated.
Short answer: A term sheet outlines the main terms of an investment — valuation, investment amount, ownership stake, and the investor's key rights. It's generally not legally binding (aside from typical confidentiality and possibly exclusivity clauses), but it's a statement of intent that sets the agenda for the subsequent shareholder agreement and the other investment documents.
What does a typical term sheet include?
- Valuation — pre-money and post-money value of the business
- Investment amount and ownership stake — how much is being invested, and what share it buys
- Investor type — ordinary shares or shares with special rights (e.g. preference shares)
- Governance — does the investor get a board seat or veto rights over certain decisions?
- Exit rights — what happens in a future sale of the business?
Why use a term sheet if it isn't binding?
It lets both parties agree on the key principles before spending time and legal fees on the full legal documents. A term sheet works as a checklist — if you can't agree on the basics here, it's better to find out now than after a few weeks of legal work.
What should you, as a founder, watch out for most?
Beyond the price (the valuation), it's often the governance and exit terms that matter most in the long run — for instance whether the investor can block future decisions, or what happens to your own ownership stake in future funding rounds (dilution). Always have a term sheet reviewed by an advisor before signing — even though it's non-binding, it sets the tone for the rest of the negotiation.
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