Term Sheets Explained Simply

A term sheet is a short document that outlines the main terms of an investment or deal—before the full legal agreement is drafted. It's not usually legally binding (except for certain clauses like exclusivity or confidentiality), but it sets the framework for the deal. If you don't understand the key terms, you might agree to terms that dilute you more than you expected, or that give investors more control than you realised. Here's what term sheets usually cover and what to look for before you sign.

What's in a term sheet?

A term sheet typically covers: Valuation and investment amount—how much the company is worth (pre-money valuation) and how much the investor is putting in. Type of security—e.g. preferred shares, convertible note, SAFE. Key rights—liquidation preference, anti-dilution, board seats, veto rights. Other terms—exclusivity, confidentiality, governing law. The term sheet is usually a few pages; the full agreement can be dozens of pages. So the term sheet is your chance to agree on the big picture before you spend time and money on legal docs.

Key terms to understand

• Valuation. Pre-money valuation is the company's value before the investment. Post-money = pre-money + investment. Your % after the round = investment / post-money (for a simple round). So if pre-money is $10M and they invest $2M, post-money is $12M and they get 2/12 ≈ 16.7%.
• Liquidation preference. If the company is sold, who gets paid first—and how much? "1x non-participating" means investors get their money back first, then the rest is shared by everyone. "Participating" means they get their money back and also share in the rest—which can mean a much bigger payout for them in a good exit.
• Anti-dilution. If the company raises a down round (lower valuation later), do the investors get more shares to compensate? "Full ratchet" is very protective for them (and harsh for you); "weighted average" is more common and fairer.
• Board and control. How many board seats do investors get? Do they have veto rights on certain decisions (e.g. sale of the company, new funding)? These affect how much control you keep.

What to look for before you sign

• Valuation and dilution. Run the numbers: what % do you have after the round? What if there's a down round and anti-dilution kicks in?
• Liquidation preference. Is it 1x or higher? Participating or non-participating? In a sale, how much do you get in different scenarios?
• Exclusivity. Are you locked into negotiating only with this investor for a period? How long? If you're giving exclusivity, make sure it's short (e.g. 30 days) and that you're comfortable with it.
• BeforeYouSign can highlight key terms in your term sheet so you know what to focus on and what to ask your lawyer about before you sign.