Term Sheet

A short document setting out the main economic and control terms of a proposed investment before full legal agreements are drafted.

Example

A term sheet specifying a 30,000,000 pre-money valuation, a 1x non-participating preference and one investor board seat.

Most terms are not binding until final documents, but they usually shape them closely, and clauses such as exclusivity may bind immediately.

Deal Terms — The economic and control provisions of an investment, including price, instrument, preferences, rights and governance.
Liquidation Preference — A contractual right for preferred shareholders to receive a stated multiple of their investment back before common shareholders receive anything, in a sale or wind-down.
Protective Provisions — Terms requiring the consent of specified investors before a company takes certain actions, such as raising money, selling the company or changing share rights.

Convertibles trade speed and low cost for an unsettled price — SAFEs and notes close quickly and cheaply but defer the valuation and the governance. Priced rounds cost more and take longer, and they settle ownership, rights and price now. (11 min)
A term sheet sets two things: who gets the money and who gets the say — Every clause in a term sheet affects either the economics - how proceeds are divided - or control - who can make or block decisions. Valuation is only one economic term among several. (10 min)
You will not set the price, but you can ask for the three things that matter — Small investors join rounds on terms the lead negotiated. What remains negotiable is usually information rights, pro-rata rights and a most favoured nation clause - and those are worth asking for every time. (10 min)
A side letter is where your specific rights live, and MFN is how you avoid being the worst-treated investor — Side letters grant individual investors rights outside the main documents. A most favoured nation clause entitles you to any better terms given to comparable investors in the same round. (10 min)