What is a term sheet?
A term sheet is a concise, bulleted document that lays out the key terms of a proposed transaction — most often a venture financing or an acquisition — before the parties draft binding contracts. It captures the economics and the control provisions on a page or two so everyone agrees on the shape of the deal before lawyers spend on the long-form documents.
Like a letter of intent, a term sheet is predominantly non-binding: the numbers and structure are statements of intent, subject to diligence and definitive agreements. A few provisions — confidentiality, exclusivity or no-shop, and sometimes a cost allocation — are typically carved out as binding.
In venture capital especially, the term sheet is the central artifact of a financing. It fixes the valuation, the security being issued, the investor protections, and the governance terms that the definitive stock purchase and shareholder agreements will then formalize.
What a term sheet covers
The exact contents depend on the deal type, but most term sheets address the same families of terms.
- Economics. Valuation (pre- and post-money in a financing) or purchase price, the amount invested, and the security — preferred stock, common, or debt.
- Liquidation preference. In a financing, how proceeds are split on an exit, including any participation and multiples.
- Control and governance. Board composition, protective provisions, and voting rights.
- Investor protections. Anti-dilution, pro-rata rights, drag-along and tag-along, information rights.
- Binding clauses. Confidentiality, exclusivity/no-shop, and expense allocation — the parts that bind on signature.
The discipline of a term sheet is that it forces the parties to confront the hard terms — preference, control, anti-dilution — early, while the deal is still cheap to walk away from, rather than discovering disagreement after the lawyers have run up fees on definitive drafts.
Why the headline number isn't the whole story
Founders and sellers often fixate on the valuation or price at the top of the term sheet, but the control and preference terms below it frequently matter more to the actual outcome. A high valuation paired with a 2x participating liquidation preference can leave the founder worse off than a lower valuation with a clean 1x non-participating preference.
The term sheet is where these trade-offs are set. An experienced counterparty reads the whole sheet as an integrated package — economics, preference, and control together — because the interaction of those terms determines who gets what in every exit scenario, not the headline number alone.