Financial Glossary
Term sheet
A term sheet is a non-binding, summary document that records the principal commercial and legal terms proposed for a transaction -- most commonly an investment, acquisition, or lending arrangement. It establishes a shared framework before lawyers draft binding agreements, reducing the risk that parties invest heavily in diligence and documentation only to discover fundamental disagreements. Key provisions typically include valuation, investment amount, security type, board composition, liquidation preferences, anti-dilution rights, and exclusivity or no-shop clauses. While generally non-binding on the deal itself, term sheets often include enforceable provisions around confidentiality and exclusivity.
Problem & Application
A SaaS startup receives a term sheet from a venture fund for a $2 million Series A. The sheet proposes a $10 million pre-money valuation (implying $12 million post-money and roughly 16.7% dilution to the fund), a 1x non-participating liquidation preference, and a standard 12-month exclusivity period. The founder must evaluate: does the liquidation preference protect the fund at the expense of common shareholders in a downside exit, or does the non-participating structure align incentives? If the company sells for $8 million before raising additional capital, the investor recoups $2 million first, leaving $6 million for common -- not catastrophic. But a 2x participating preference on the same deal would give the fund $4 million plus 16.7% of the remainder, meaningfully eroding founder upside. Understanding each clause before countersigning avoids disputes that surface only at a liquidity event, often years later.
In Short
A well-drafted term sheet provides a roadmap for formal agreements and helps mitigate risks by ensuring that both parties agree on key terms before committing to a deal.
