A term sheet is a non-binding document outlining the key terms and conditions of a proposed investment or business deal. It sets out valuation, ownership, investor rights, and governance structure — serving as the foundation for legally binding agreements such as shareholder or investment contracts.
Why Term Sheets Matter for Entrepreneurs and Investors
Whether you are raising your first investment round or negotiating a strategic partnership, the term sheet is the first formal step that defines the deal. It is the framework on which lawyers and accountants build binding agreements.
A well-crafted term sheet helps both founders and investors align expectations early, reduce misunderstanding, and speed up the due-diligence and signing process. Getting it wrong, however, can lead to lost funding, founder dilution, or control disputes later.
At its core, a term sheet is about clarity and balance — protecting both parties while keeping negotiations efficient.
What Is a Term Sheet?
A term sheet is a summary of key financial and legal terms for an investment. It is typically non-binding, meaning it records an agreement in principle before detailed legal documents are prepared.
Commonly used in venture capital and private equity, a term sheet outlines:
- The amount of investment
- The company’s valuation
- The type of shares issued
- The rights and obligations of each party
Although most clauses are non-binding, sections on confidentiality, exclusivity, or governing law often are binding. This balance allows both sides to negotiate in good faith while maintaining flexibility.
Term sheets are also used beyond fundraising — for mergers and acquisitions, joint ventures, or strategic partnerships.
Key Components of a Term Sheet
Every term sheet looks slightly different, but several core clauses appear in nearly all of them. Understanding these terms helps founders negotiate with confidence.
1. Valuation and Investment Amount
This defines how much the company is worth and how much equity the investor will receive.
- Pre-money valuation: the company’s value before investment.
- Post-money valuation: the value after the investment is added.
Example: If an investor puts £500,000 into a company valued at £2 million pre-money, they will own 20% of the business post-money.
2. Type of Shares
Investors may receive ordinary or preferred shares. Preferred shares often come with additional rights such as dividend preference or liquidation priority.
3. Liquidation Preference
This determines how sale proceeds are distributed if the company is sold or liquidated.A 1x non-participating preference, for instance, means the investor gets their initial investment back before others share the remaining proceeds.
4. Founder Vesting
Investors usually require founders to “earn” their shares over time (for example, 25% per year over four years). This ensures founders remain committed to growing the company.
5. Anti-Dilution Protection
This protects investors if future funding rounds happen at a lower valuation (“down rounds”). The investor may receive additional shares to maintain their ownership percentage.
6. Governance and Control
Specifies the number of board seats and any veto rights investors may have over major decisions (such as selling the company, issuing new shares, or changing business direction).
7. Drag-Along and Tag-Along Rights
- Drag-along rights allow majority shareholders to compel minority shareholders to join in a sale.
- Tag-along rights let minority shareholders sell their shares alongside majority owners, ensuring equal treatment.
8. Exclusivity and Confidentiality
These are usually binding. They prevent founders from negotiating with other investors for a set period and ensure deal information remains private.
9. Conditions Precedent
Lists actions that must occur before the investment closes — for example, completing due diligence or amending company articles.
10. Closing and Timeline
Outlines the expected steps, deadlines, and any fees or costs associated with finalising the deal.
How to Read and Analyse a Term Sheet
Founders often focus on valuation, but other clauses can have greater long-term impact. A slightly lower valuation with fair control terms may be better than a high valuation with restrictive investor rights.
When reviewing a term sheet:
- Check how control is distributed — especially voting rights and veto powers.
- Review the liquidation preference — aggressive preferences can significantly reduce your payout on exit.
- Watch for broad anti-dilution clauses that can heavily dilute founders in future rounds.
- Assess board composition — investors should not hold majority control in early rounds.
- Ensure vesting terms are reasonable and protect both sides.
Red flags include unilateral investor veto rights, restrictive fundraising terms, or unclear exit conditions. When in doubt, seek independent legal advice before signing.
When Is a Term Sheet Legally Binding?
Most term sheets are explicitly non-binding, except for certain clauses. Always check for these binding sections:
- Confidentiality – both sides agree to keep discussions private.
- Exclusivity (No-Shop Clause) – the company cannot negotiate with other investors for a defined period.
- Jurisdiction and Governing Law – defines which country’s laws apply if disputes arise.
If the term sheet does not clearly state which clauses are binding, it can cause serious legal confusion. Always use phrases like “subject to contract” to preserve flexibility until formal documents are signed.
After the Term Sheet: What Happens Next
Once both parties agree to a term sheet, the process moves to the due diligence and legal documentation stages:
- The investor conducts financial, legal, and commercial checks.
- Lawyers draft the investment agreement, shareholders’ agreement, and updated articles of association.
- Both sides review, negotiate, and finalise the documents.
- Funds are transferred, and new shares are issued.
A clear term sheet helps this phase progress quickly by ensuring all major commercial points have already been agreed upon.
FAQs
Is a term sheet legally binding?
Usually not, but confidentiality and exclusivity clauses often are.
What is the difference between a term sheet and a letter of intent (LOI)?
A term sheet focuses on investment details; an LOI is broader and often used for mergers or acquisitions.
Should founders sign an investor’s term sheet without advice?
No — even though it is non-binding, the term sheet influences every later contract. Always seek professional advice.
Can you renegotiate after signing a term sheet?
Yes, but it is difficult once both sides have agreed in principle. Significant changes may damage trust or delay funding.
Who prepares the term sheet?
Typically, the investor drafts it, but founders can propose revisions through their legal or accounting advisors.
Conclusion: A Smart Term Sheet Builds Strong Partnerships
A term sheet is not just paperwork — it is a blueprint for your investor relationship. It shapes ownership, control, and future growth long before money changes hands.
By understanding its clauses, founders can negotiate confidently and build partnerships that last beyond the first round.
At Persona Finance, we assist startups and investors in reviewing, drafting, and negotiating term sheets to ensure deals are fair, transparent, and aligned with long-term goals.
👉 Contact Persona Finance today to make sure your next funding round starts with a strong foundation.
