Term Sheet
A non-binding document outlining the key economic and control terms of a proposed investment.
A term sheet lays out the core terms of a deal — valuation, amount raised, liquidation preference, board composition, protective provisions, option pool size — before lawyers draft the full binding legal documents. Most provisions are explicitly non-binding, letting either side walk away, but confidentiality and exclusivity ('no-shop') clauses are usually binding.
Signing a term sheet typically triggers an exclusivity period during which the company agrees not to solicit or negotiate with other investors, giving the lead investor room to complete diligence and finalize documents without a competing bid emerging mid-process.
The gap between a clean, founder-friendly term sheet and a dense one loaded with unusual provisions (full-ratchet anti-dilution, multiple liquidation preferences, broad protective provisions) is where a huge amount of long-term value gets negotiated — far more than in the headline valuation number.
Signing usually starts an exclusivity clock. During the no-shop window the lead controls the pace, can slow-walk diligence, or try to retrade terms, while the founder can't entertain a better offer. That's why the standard advice is to collect competing term sheets before signing any of them — the first signed no-shop ends the auction.
Because the economic terms are non-binding, an investor can change them after signing, and some do. Check the lead's reputation for retrading with founders they've backed before you sign.
Hypothetically, a lead offers $5M at a $20M pre-money valuation with a 15% option pool created in the pre-money. The investor gets $5M / $25M = 20%; because the pool is carved out before the investment, it comes entirely from existing holders, leaving founders and earlier investors with 65% after the round.
Get an experienced startup lawyer to redline the term sheet before signing, even for a 'standard' deal — the no-shop clause locks you in, so this is the last moment of real leverage before the lead investor controls the pace and terms of diligence.
Is a term sheet legally binding?
Mostly not — the economic and governance terms are typically non-binding, but confidentiality and exclusivity (no-shop) clauses usually are, so signing does have real legal consequences.
Can an investor change the terms after a term sheet is signed?
Yes. Because economic terms are usually non-binding, a lead can try to retrade valuation or add provisions during diligence, and the no-shop makes it hard to walk to a competing bidder.
Should a founder negotiate multiple term sheets at once?
If you can generate them, yes — but collect them before signing any, because the first signed no-shop ends the competition. Then sign the best overall package, not just the highest valuation.
How long does it take to close after signing a term sheet?
The no-shop window sets the practical timeline. Straightforward deals can close faster; complex rounds with more diligence or regulatory review take longer.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.