Term Sheet Checklist Before Signing

What a term sheet is (and is not)

A term sheet is a summary of the principal terms of an investment, signed before the definitive agreements (share purchase agreement, shareholders agreement, articles amendments). It is usually non-binding on the economics and most terms, but certain clauses — exclusivity, confidentiality, expenses — can be binding immediately.

Because the term sheet sets the framework, terms agreed here are hard to reopen later. The negotiation leverage a founder has is greatest before the term sheet is signed; after signing, the deal is largely set. This is why every term should be understood before signing, not after.

Valuation: pre-money vs post-money

Valuation determines how much of the company the investor receives for their investment. The key distinction is between pre-money and post-money. Pre-money valuation is the company's value before the investment; post-money is the value after the investment is added. The investor's percentage is calculated on the post-money.

A common trap is ambiguity: a valuation stated as a number without specifying pre- or post-money can be interpreted either way, with a meaningful difference in dilution. The term sheet should state explicitly whether the valuation is pre- or post-money.

Liquidation preference

A liquidation preference gives the investor the right to receive their investment back — often a multiple of it — before the remaining proceeds are distributed to other shareholders. A 1x non-participating preference is standard: the investor gets their money back first, then converts to shares if that is better. Higher multiples (2x, 3x) or participating preferences (where the investor gets their preference and then also shares in the remainder) shift economics significantly toward the investor.

The preference also defines what counts as a liquidation — usually a sale of the company, not just a dissolution. A broad definition can give the investor preference rights on transactions the founder did not expect.

• Preference multiple (1x is standard; higher multiples are more investor-favorable).
• Participating vs non-participating (and any cap on participation).
• Definition of liquidation event.
• Seniority relative to other investors and converts.

Anti-dilution protection

Anti-dilution protection adjusts the investor's price if the company raises a later round at a lower price (a down round). Broad-based weighted average is the most common and balanced approach. Full ratchet is more aggressive: it adjusts the investor's price all the way down to the new lower price, heavily diluting the founders.

The type of anti-dilution affects what happens in a down round, which is hard to predict at signing. A full ratchet can be very painful for founders; weighted average is the market norm and is generally acceptable.

Board and voting control

Board composition determines who controls day-to-day governance. A term sheet will specify the board size and the allocation of seats among founders, investors and independent directors. The balance of seats can shift control of the board, and thus of many decisions, to the investors.

Voting thresholds for major decisions — issuing shares, selling the company, changing the articles — also allocate control. Protective provisions (veto rights) let an investor block specific actions even without board control.

Founders should understand what decisions they can make alone, which require investor consent, and which require a board majority they may not control.

Protective provisions and veto rights

Protective provisions are veto rights that let the investor block certain actions, regardless of their board representation. Common protected actions include issuing new shares, changing share class rights, selling the company, taking on debt above a threshold, and changing the board size.

A long list of protective provisions can transfer practical control of major decisions to the investor. The list should be reviewed and negotiated — some protections are standard, others are not, and the boundary should be deliberate.

Other terms that matter

Several other terms deserve attention before signing:

• Founder vesting — investors often require founders to re-vest, which affects what founders keep if they leave.
• Option pool size and timing — whether it is created before or after the round (who is diluted).
• Information rights — the investor's right to receive financial and operating information.
• Pro-rata rights — the investor's right to participate in future rounds.
• Exclusivity and no-shop — a binding clause preventing the company from seeking other investors for a period.
• Expenses — who pays the investor's legal fees, regardless of whether the deal closes.
• Conditions precedent — what must be true (due diligence, legal opinions) before closing.

Each of these can be negotiated, and each affects the deal. Before signing, the founder should understand the combined effect of all terms — not just the valuation. The Investment Agreements service covers term sheet review and negotiation.