Term Sheet

Quick Definition

A non-binding document outlining the key terms of a proposed investment before final legal documents are drafted.

What is a Term Sheet?

A term sheet is a non-binding document outlining the key terms of a proposed investment. It covers valuation, investment amount, investor rights, board composition, and other deal terms. Once signed, it typically leads to due diligence and final legal documents.

Term sheets are usually non-binding except for exclusivity (no-shop) and confidentiality provisions.

Key Term Sheet Elements

• Valuation: Pre-money and post-money valuation.
• Investment amount and securities type.
• Liquidation preferences and participation rights.
• Anti-dilution provisions.
• Board composition and voting rights.
• Pro-rata rights for future rounds.
• Information rights and protective provisions.

Negotiating Term Sheets

Focus on economics (valuation, preference) and control (board seats, protective provisions). Many other terms are standard. Get experienced counsel to review before signing. The exclusivity clause prevents shopping the term sheet to other investors.

Formula

No formula - term sheet is a document outlining proposed investment terms.

Typically 5-10 pages covering economics, control, and protective provisions.

Example

Key term sheet sections:

• Valuation: $10M pre-money
• Investment: $2.5M Series A
• Liquidation preference: 1x non-participating
• Board seats: 2 founders, 1 investor, 2 independent
• Pro rata rights: Yes, for investments over $500K
• Anti-dilution: Broad-based weighted average

Most terms are negotiable except valuation and amount.

Related Terms

Due Diligence

The comprehensive investigation of a company by potential investors or acquirers before completing a transaction.

Valuation Cap

The maximum valuation at which a SAFE or convertible note converts to equity, protecting early investors from excessive dilution.

Liquidation Preference

The right of preferred shareholders to receive their investment back before common shareholders in a sale or liquidation.

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