Glossary
What Is a Term Sheet?
Updated · Team Fonda
Short answer
A term sheet is a short document that sets out the main terms of a proposed investment in your company, such as the amount, the valuation and the rights the investor receives. It is mostly non-binding and acts as the blueprint for the full legal contracts that follow.
Key takeaways
- A term sheet covers two things: economics (who gets how much money) and control (who decides what).
- Most of it is usually non-binding, but clauses such as confidentiality and exclusivity often are binding.
- Valuation is only one line. Liquidation preference, the option pool and board seats can matter as much.
- Have a startup lawyer read it before you sign, because the final contracts will follow it closely.
What a term sheet means in plain words
When an investor decides they want to invest, they do not send a full contract first. They send a few pages that summarize the deal. If you both sign, lawyers turn that summary into the long documents, and the investor checks your company in detail, a process called due diligence. Money arrives only after those steps.
Signing a term sheet is therefore not the same as closing a round. It is an agreement on the outline, and it is hard to reopen points afterward.
The main terms and what they mean
| Term | Plain meaning | Type |
|---|---|---|
| Investment amount | How much money comes in | Economics |
| Pre-money valuation | What the company is valued at before the money | Economics |
| Option pool | Shares set aside for future employees | Economics |
| Liquidation preference | Who gets paid first, and how much, if the company is sold or closed | Economics |
| Anti-dilution | How the investor is protected if you later sell shares at a lower price | Economics |
| Board seats | Who sits on the board of directors | Control |
| Protective provisions | Decisions that need the investor's approval | Control |
| Pro rata rights | The investor's right to invest in later rounds to keep their percentage | Economics |
| Founder vesting | Founders earn their shares over time | Economics |
| Exclusivity (no-shop) | You agree not to seek other offers for a set period | Usually binding |
Formula behind the headline numbers
Post-money valuation = pre-money valuation + investment. Investor ownership = investment / post-money valuation.
For more on that formula, see pre-money vs post-money valuation. Founder vesting has its own page too.
A worked example
This is a made-up offer to show how the lines interact. Say an investor offers $1,000,000 at a $4,000,000 pre-money valuation, with a 10% option pool created before the investment and a 1x non-participating liquidation preference.
- Ownership: post-money is $5,000,000, so the investor owns $1,000,000 / $5,000,000 = 20%.
- Option pool: the 10% pool comes out of the founders' side because it is created before the investment. After the round the split is investor 20%, pool 10%, founders 70%.
- Sale for $3,000,000: a 1x non-participating preference lets the investor choose between getting their $1,000,000 back or taking their 20%, which would be $600,000. They take $1,000,000. Everyone else shares $2,000,000.
- Sale for $20,000,000: 20% is $4,000,000, which beats $1,000,000, so the investor takes their percentage like any other shareholder.
The same valuation with a different preference or pool would pay you a different amount. You can model the ownership side in the equity dilution calculator.
Why it matters for a first-time founder
You usually see your first term sheet at a priced round, most often seed funding or a Series A, from a venture capital firm or a lead angel. Earlier money often arrives on a SAFE or convertible note, which has far fewer terms.
A term sheet comes at the end of a long process: an idea with evidence behind it, a plan and a pitch deck. In Fonda that work runs from the Validate phase through the business plan to the Raise step. The stronger your evidence, the more room you have to negotiate.
Common mistakes
- Looking only at valuation. A high valuation with heavy preferences can leave you with less than a lower, cleaner offer.
- Treating non-binding as harmless. Investors expect the final documents to match. Walking back a signed term is costly for your reputation.
- Signing exclusivity too early. Once you agree not to talk to others, you lose your alternatives for that period.
- Not asking what a term means. It is normal to ask the investor to explain every clause.
- Negotiating without a lawyer. Terms and what is customary differ by country. Use a lawyer who works on startup financings.
Frequently asked questions
Is a term sheet legally binding?
Mostly not. The deal terms are usually stated as non-binding, while a few clauses, typically confidentiality and exclusivity, are often binding. The document itself says which parts bind you, so read that section and confirm with a lawyer.
What happens after you sign a term sheet?
The investor carries out due diligence, lawyers draft the full agreements, both sides negotiate details, and then the round closes and the money is transferred. A deal can still fall through during this period.
Who writes the term sheet?
Usually the lead investor, meaning the investor putting in the largest amount and setting the terms for the round. Other investors in the round generally follow the same terms.
Can you negotiate a term sheet?
Yes. Investors expect discussion. Decide which few terms matter most to you, and remember that having more than one interested investor is the strongest negotiating position.