What Is a Term Sheet?
A term sheet outlines the key terms of an investment before legal documents are drafted. Learn what to expect and what to negotiate.
Key Takeaways
- A term sheet is a non-binding document that outlines the key financial and governance terms of a proposed investment.
- It serves as the basis for drafting legally binding shareholder and investment agreements.
- Understanding each term's implications is critical because they determine your control, economics, and future flexibility.
What a term sheet contains
A typical term sheet covers: valuation (pre-money and post-money), investment amount, share class and rights, liquidation preferences, anti-dilution provisions, board composition, voting rights, protective provisions (investor vetoes), option pool size, dividend policy, and conditions precedent such as due diligence. While non-binding, term sheets set expectations that are difficult to renegotiate later in the process.
Economic terms vs control terms
Economic terms determine how money is distributed: valuation, liquidation preference, participation rights, and anti-dilution. Control terms determine who makes decisions: board seats, protective provisions, drag-along rights, and information rights. First-time founders often focus solely on valuation while overlooking control terms that may be more consequential for running the business day-to-day.
Negotiation approach
Receive the term sheet, then take time to understand every clause before responding. Consult a lawyer experienced in venture funding in your jurisdiction. Prioritise the terms that matter most: valuation, liquidation preference, board composition, and anti-dilution are typically the most impactful. Having multiple term sheets creates negotiating leverage. In African markets, where fewer VCs may be active, this leverage can be harder to achieve.
From term sheet to close
Once both sides agree on the term sheet, lawyers draft the definitive agreements: the Share Purchase Agreement, Shareholders Agreement, and board resolutions. Due diligence runs in parallel. The process from signed term sheet to closed funding typically takes four to eight weeks but can stretch longer if issues arise during diligence. Keep the business running during this period; do not stop executing.