The short answer
A term sheet is a short document that lays out the main terms of an investment, such as valuation, amount, liquidation preference, board seats and investor rights, before lawyers draft the final agreements. Most of it is non-binding, though clauses such as confidentiality and exclusivity (no-shop) often are binding.
- A term sheet summarizes the deal; final documents come later.
- Economic terms: valuation, amount, option pool, liquidation preference.
- Control terms: board seats, protective provisions, investor rights.
- Most terms are non-binding; confidentiality and no-shop clauses often bind.
How it works
In a priced round, the lead investor usually sends a term sheet after diligence. You negotiate it, sign it, and then lawyers turn it into the definitive documents. NVCA publishes free model financing documents that many US venture deals use as a starting point, including a certificate of incorporation, stock purchase agreement, investors' rights agreement, voting agreement, and right of first refusal and co-sale agreement.
What a seed term sheet might cover (hypothetical)
| Term | Example |
|---|---|
| Amount and price | $2M at an $8M pre-money valuation |
| Option pool | 10% post-closing, included in the pre-money |
| Liquidation preference | 1x non-participating |
| Board | Two founders, one investor |
| Investor rights | Pro rata, information rights |
| No-shop | 30 days, binding |
A quick review checklist
- Your ownership after the round, including the option pool and converting SAFEs.
- The liquidation preference: multiple, participating or not.
- Board composition and which decisions need investor approval.
- Length of the no-shop and any other binding clauses.
- Who pays legal fees, and any cap on them.
Why it matters to a pre-seed founder
Many pre-seed rounds use SAFEs with no term sheet at all, so your initial priced round may be the moment you see one. Read every line for what you'll own after the round and who controls key decisions, not just the headline valuation. Have a startup lawyer review it before signing. See liquidation preference, pro rata rights and our SAFE vs priced round guide.
What happens after you sign
Lawyers for both sides draft the definitive documents, the investor finishes any confirmatory diligence, and the round closes when the documents are signed and the money arrives. Keep talking to other investors politely until then if the no-shop allows it, and keep your existing investors updated.
Frequently asked questions
Is a term sheet legally binding?
Mostly not. Economic and control terms are usually non-binding until the final documents are signed, but confidentiality and no-shop clauses are often binding.
Do SAFE rounds have term sheets?
Usually not. Standard SAFEs are short enough that the document itself carries the key terms, mainly the valuation cap.
Should I get a lawyer to review a term sheet?
Yes. A startup lawyer can explain what each term means for your ownership and control before you sign.