Key takeaways
- Valuation is only one term; control and preference terms can matter more.
- Most clauses are standard; know which few to negotiate.
- Always have a startup lawyer review before signing.
What a term sheet is
A term sheet is a short document that sets out the main terms of an investment. Most of it is not legally binding, but confidentiality and exclusivity (no-shop) clauses usually are. Once signed, lawyers draft the full shareholder and subscription agreements.
Economic terms
- Valuation and amount: pre-money valuation and how much is invested, which together set the investor's ownership.
- Liquidation preference: who gets paid first in a sale. 1x non-participating is standard and founder-friendly; participating or multiple preferences are more investor-friendly.
- ESOP pool: whether the option pool is created before or after the investment. A pool created pre-money dilutes only existing shareholders.
- Anti-dilution: protection for investors in a down round. Broad-based weighted average is standard; full ratchet is harsh.
Control terms
- Board composition: how many seats founders, investors and independents hold.
- Protective provisions: decisions that need investor approval, such as new share issues or selling the company.
- Founder vesting: investors often ask founders to re-vest shares over 3–4 years.
- Information rights and pro rata rights.
What to negotiate
Focus on the terms with long-term impact: liquidation preference, board control, option pool size and protective provisions. Do not trade a slightly higher valuation for terms that cost you control. See SAFE vs convertible note vs priced round for the instruments behind the deal.
This guide is general information, not legal, tax or financial advice. Rules and programme terms change, so check official sources and speak to a qualified adviser before making decisions.
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