What is a term sheet?

At its core, a term sheet is a non-binding agreement that summarises the primary terms of an investment. It is the stage where the parties agree on the major deal points before drafting the definitive investment agreements, such as the shareholders’ agreement and articles of association.

Think of a term sheet as a roadmap: it provides direction and clarity, ensuring that everyone is on the same page before committing time and resources to detailed legal drafting. However, while non-binding in most respects, founders should treat term sheets with caution - once agreed, the terms are challenging to renegotiate.

Why Is the term sheet important?

• Efficiency and cost management: by ironing out the major commercial terms upfront, the term sheet makes the legal process smoother and less costly.
• Setting expectations: it clarifies the rights and obligations of all parties, helping to avoid surprises during later stages of negotiation.
• Strategic considerations: the terms agreed in the term sheet influence the long-term dynamics between the founders, the investors, and the company.

For founders, every clause in a term sheet has implications—not just for the investment round at hand but for future fundraising, governance, and even exit strategies.

Key features of a term sheet

While the specific content of a term sheet varies, typical sections include:

• Valuation: defines the company's pre-money and post-money valuation, forming the basis of the investment.
• Control: establishes investor rights over major decisions, often through board representation and consent rights.
• Economic terms: covers liquidation preferences, anti-dilution protections, and other financial mechanics.
• Miscellaneous provisions: includes warranties, fees, and exclusivity arrangements.

A well-negotiated term sheet strikes a balance between protecting the investor's capital and preserving the founders' ability to run and grow their business effectively.

Why this matters for founders

For founders, raising capital is not just about securing funds - it’s about building partnerships that will help grow and sustain the business. Understanding term sheets will enable you to negotiate terms that align with your long-term vision and protect your interests.

Read the next article in our ‘Anatomy of a term sheet’ series, exploring how pre-money valuation shapes your funding round.

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.