Term Sheet
The short, mostly non-binding document in which an investor sets out the terms of a proposed round: valuation, amount, the option pool, the liquidation preference, anti-dilution, board composition, protective provisions and the rest. The economics and the control terms both live here, and a founder who reads only the valuation line has read the least important sentence on it.
How a startup is financed · 23 of 26Next: SEIS (Seed Enterprise Investment Scheme)
Why Term Sheet matters in interviews
The term sheet is the document a venture associate spends the most time reading and the one candidates least often have seen, which is why a good interview will hand you one and ask what matters. The valuation line is the least of it. Economics and control are the two halves, and the questions that separate candidates are about the second.
How it works in practice
The economic terms. Amount raised and pre-money or post-money valuation; the option pool and whether it sits in the pre; the liquidation preference, its multiple, participation and seniority; anti-dilution; dividends, usually non-cumulative and rarely paid; pro rata rights; and, in later rounds, redemption rights and pay-to-play. Together they decide who gets what at every exit value, which is the whole of the exit waterfall.
The control terms. Board composition, typically founders, the lead investor and an independent at seed or A; protective provisions listing decisions that need preferred consent; information rights; drag-along and its threshold; right of first refusal and co-sale on transfers; founder vesting and acceleration. These decide who can sell the company, who can block a round, and what a founder who leaves takes with them.
Reading one. Binding clauses are usually only confidentiality, exclusivity (no-shop for 30 to 60 days) and expenses; the rest is an agreement to negotiate documents on these terms. The standard forms published by the NVCA in the United States and the BVCA in the United Kingdom are the reference, and a term sheet that departs from them is worth asking why.
What candidates get wrong
- Reading the valuation and stopping. A higher valuation with a 2x participating preference and a full ratchet is a worse deal than a lower one on standard terms at most exits.
- Treating protective provisions as boilerplate. The list is what a minority investor actually controls, and it compounds with each round.
- Assuming non-binding means unimportant. Reopening an agreed term in the long-form documents costs trust that the negotiation will need later.
Term Sheet: frequently asked questions
What is in a venture capital term sheet?
The proposed terms of an investment: the amount and valuation, the option pool, the liquidation preference and its participation and seniority, anti-dilution protection, dividends and pro rata rights on the economic side; and board composition, protective provisions, information rights, drag-along, right of first refusal, co-sale and founder vesting on the control side. Most of it is non-binding; exclusivity, confidentiality and expenses usually bind. The standard forms are published by the NVCA in the US and the BVCA in the UK.
What are the most important terms in a term sheet besides valuation?
The liquidation preference (multiple, participation and seniority), because it decides who gets what at most realistic exit values; the option pool and whether it is in the pre-money, because it changes the effective valuation; anti-dilution, because it decides what a later down round costs the founders; and the protective provisions and board composition, because they decide who controls the decisions that matter, including whether the company can be sold.
Where Term Sheet comes up
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The venture capital hubRelated Venture Capital terms
How a startup is financed: keep going
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