Full Definition
A term sheet is a non-binding document that outlines the key terms and conditions under which an investment will be made. It serves as the foundation for legally binding agreements and is typically the first formal step in closing a fundraising round.
Key Components of a Term Sheet
- Valuation: Pre-money and post-money valuation
- Investment Amount: Total capital being raised
- Security Type: Preferred stock, common stock, or convertible instrument
- Liquidation Preference: Payout priority in case of exit or liquidation
- Board Composition: Number of board seats and who fills them
- Anti-dilution Protection: Protection against future down rounds
- Vesting Schedule: How founder shares vest over time
- Voting Rights: Investor voting power on key decisions
- Pro Rata Rights: Right to participate in future rounds
Negotiating a Term Sheet
While technically non-binding, term sheets set the framework for final legal documents. Key negotiation points include valuation, liquidation preferences, board control, and anti-dilution provisions. Founders should always have an experienced startup lawyer review the term sheet.
From Term Sheet to Closing
Real-World Example
A VC sends a term sheet offering $8M for 25% of the company at a $24M pre-money valuation with 1x non-participating liquidation preference.
Frequently Asked Questions
Is a term sheet legally binding?
What should founders negotiate in a term sheet?
How long does it take to go from term sheet to close?
Related Terms
The comprehensive investigation and evaluation of a company before finalizing an investment deal.
The value of a company before receiving new investment in a funding round.
The right of preferred shareholders to be paid before common shareholders in a liquidation event.
Protection for investors that adjusts their equity if the company raises money at a lower valuation.
A group of individuals elected to represent shareholders and oversee the management of a company.
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