A term sheet is a short document that sets out the main terms of an investment before the full legal paperwork is written. It says how much the investor puts in, at what valuation, and what rights they get in return. Most of it is not legally binding, but in practice the deal you sign here is the deal you get.
That is why the term sheet matters more than any other document in your raise. Once it is signed, lawyers turn it into final agreements and there is very little room to renegotiate.
What Is in a Term Sheet?
Every term sheet covers two kinds of terms: economics (who gets how much money) and control (who gets to decide what). Founders often focus on the first and overlook the second.
The Economic Terms
Valuation and investment amount
The headline numbers: how much is invested and at what pre-money valuation. Together they decide how much of the company the investor owns. A $2M investment at an $8M pre-money valuation gives a $10M post-money valuation, so the investor owns 20%.
Before you negotiate, know what range is realistic for your stage. The startup valuation calculator gives you a starting point based on stage and region.
The option pool
Most term sheets ask for an option pool of around 10% to 15%, and they usually ask for it to be created in the pre-money. That means the pool comes out of the founders' share, not the investor's. On an $8M pre-money, a new 10% pool lowers your effective valuation to roughly $7M. Size the pool to a real hiring plan rather than accepting a round number.
Liquidation preference
A liquidation preference decides who gets paid first when the company is sold. The early-stage standard is 1x non-participating: the investor gets their money back or their share of the sale, whichever is larger. Watch for multiples above 1x or "participating" preferences, which let the investor take their money back and also share in what is left.
Anti-dilution
This protects investors if you later raise at a lower valuation. The common, founder-friendly version is "broad-based weighted average". "Full ratchet" is much harsher and rare at early stage.
The Control Terms
Board seats
At seed, a typical board has two founders and one investor. Giving away board control this early is unusual and worth pushing back on.
Protective provisions
These are decisions that need investor approval, such as selling the company, issuing new shares or changing investor rights. A short standard list is normal. A long list that covers budgets or hiring is a red flag.
Pro rata and information rights
Pro rata rights let the investor keep their percentage in future rounds. Information rights give them regular financial updates. Both are standard, though many founders limit pro rata to larger investors.
Vesting
Investors expect founder shares to vest, usually over four years with a one-year cliff. If you have already been working for a year or more, you can ask for credit for that time.
Where Founders Lose the Most
- Comparing offers on valuation alone. A higher number with a big pre-money pool and a participating preference can be worth less than a lower, cleaner offer.
- Forgetting earlier SAFEs. Your SAFE notes convert in the priced round and dilute you alongside the new investor. Model it in the equity dilution calculator first.
- Not knowing your own cap table. Have an up-to-date cap table ready before the conversation starts. Read Cap Table 101 if you need a refresher.
- Signing without a lawyer. A startup lawyer who has seen many term sheets will spot unusual terms in minutes.
How to Get to a Term Sheet
A term sheet comes after investors are convinced. That means a clear problem, real evidence of demand and a team that can deliver. If you are still preparing, start with how to get investors and make sure your pitch deck answers the questions investors ask first.
This article explains common terms in plain language and is not legal advice.