What is a Term Sheet?
A Term Sheet is a non-binding legal document that outlines the principal financial and governance conditions under which an investor (usually the Lead Investor) agrees to invest in a company. It is the blueprint for the final, complex, and legally binding definitive agreements.
The purpose of the Term Sheet is to ensure that founders and investors agree on the valuation, control, and exit mechanisms before incurring significant legal costs drafting the final shareholder agreement.
The Two Pillars Term Sheets are generally divided into two main categories of clauses:
- Economic Terms: These dictate how the money is spent and returned. Key items include Pre-Money Valuation, Investment Amount, Liquidation Preference, and Anti-Dilution provisions.
- Control and Governance Terms: These dictate who runs the company. Key items include Board Seats, Protective Provisions (veto rights), and Drag-Along/Tag-Along Rights.
Binding vs. Non-Binding While the Term Sheet as a whole is non-binding (meaning the investor is not legally obliged to invest, nor is the founder obliged to sell), a few clauses are typically made legally binding immediately upon signing:
- Exclusivity/No-Shop: The founder agrees not to pitch other investors while due diligence is ongoing.
- Confidentiality: Both parties agree not to disclose the deal's terms publicly.
- Expenses: Who pays the legal fees (usually the startup, even if the deal fails).
Key Takeaway: The Term Sheet is the negotiation summary. Once signed, the negotiation is over, and the detailed legal due diligence begins.
