Term Sheet
Also known as Termsheet, TS, Letter of Intent, LOI
A term sheet is a non-binding document that outlines the price, structure, and key clauses of a proposed venture investment. It precedes the definitive financing documents and sets the framework the lawyers will paper, with only confidentiality, exclusivity, and expense provisions usually binding.
In depth
The term sheet is a short document, usually four to ten pages, that captures the deal in summary form before the lawyers draft the definitive agreements. It sets the price, the security being issued, the rights of the new investor, governance, and the deal economics on a future exit. The format follows industry conventions stabilized by the NVCA model documents, so partners and founder-side counsel can read a term sheet in minutes and immediately spot anything off-market.
The non-binding nature is structural. Term sheets are issued before confirmatory diligence is complete, so the lead needs the option to walk away if material facts surface. In practice, signed term sheets close 85 to 95% of the time. The reputational cost of pulling a signed term sheet is high enough that investors do so only when something genuinely new and disqualifying appears.
Why it matters
For founders, the term sheet is the only document where they retain meaningful negotiating leverage. Once signed, the no-shop locks them in and the definitive documents replicate the term sheet faithfully. Every dollar of valuation, every basis point of option pool, and every governance clause is decided in the term sheet phase. For investors, the term sheet is the moment to translate diligence judgment into structure, especially around downside protection and information rights.
Worked example
A stylized Series A term sheet for a B2B SaaS company:
| Clause | Term |
|---|---|
| Pre-money valuation | $25.0M |
| Investment amount | $8.0M |
| Post-money valuation | $33.0M (24.2% to new investors) |
| Option pool refresh | Top up to 12% post-money, taken from pre-money (founder dilution) |
| Security | Series A Preferred Stock |
| Liquidation preference | 1x non-participating, converts to common on qualified IPO |
| Anti-dilution | Broad-based weighted average |
| Board composition | 2 common (founders), 1 preferred (lead), 1 independent (mutual approval) |
| Protective provisions | Standard NVCA list: sale, amendment of certificate, new preferred above |
| Pro rata rights | Major investors only (>5% holding) for future rounds |
| No-shop | 30 days |
Walk through the four clauses that determine real founder outcome. The pre-money of $25M means founders price the company at that level before new capital. The option pool refresh of 12% taken pre-money dilutes founders by roughly 3.5% of post-money before the new investors come in, because the pool top-up comes out of the existing cap table. The 1x non-participating preference means investors get their $8M back first on exit, then choose between that or their pro rata share, whichever is greater. The board structure leaves founders in control on a 2-1-1 split as long as the independent stays neutral, which is why the independent selection clause matters as much as the valuation.
Frequently asked
Is a term sheet legally binding?
Mostly no. Economic and governance terms are non-binding markers of intent. The exceptions are usually the no-shop (exclusivity) clause, confidentiality, and the agreement on who pays legal fees. Once signed, term sheets very rarely fall through, but the binding force comes from reputation and the no-shop, not contract law.
What are the most negotiated clauses in a venture term sheet?
Pre-money valuation, the size of the option pool refresh (because it dilutes founders before the round closes), liquidation preference, board composition, protective provisions, and anti-dilution. Pro rata rights and information rights get debated less but matter at the next round.
What is a 'clean' term sheet?
A clean term sheet uses 1x non-participating preferred liquidation, no special veto rights beyond standard protective provisions, no full-ratchet anti-dilution, and a board sized to the round (commonly 2 founders + 1 investor + 1 independent at Series A). Anything spicier is a signal worth investigating.
How long does a term sheet take to convert to closing?
Three to six weeks after signing, dominated by confirmatory diligence and lawyering of the definitive documents. Growth rounds can stretch to two months if there is a 409A, QoE, or regulatory filing involved.
Can a founder shop a signed term sheet?
Not without breaching the no-shop provision, which usually runs 30 to 45 days. Doing so torches the relationship with the issuing investor and is widely communicated in the VC community. The right move is to negotiate hard before signing, then honor the exclusivity.
Sources & further reading
- NVCA Model Term Sheet (2020), the industry-standard template that defines the line items in a venture term sheet— National Venture Capital Association
- Cooley GO: Negotiating Term Sheets, the Rule of 3 framing for which clauses matter most— Cooley LLP
- Carta: What is a Term Sheet? founder-facing breakdown of economic and control terms— Carta
- Cooley GO: NVCA Financing Documents generator, mapping a signed term sheet to the definitive financing documents— Cooley LLP