What is a term sheet and what are its key terms?
Short Answer
A term sheet is a non-binding agreement outlining the key financial and legal terms of an investment — including valuation, investment amount, liquidation preference, board rights, and anti-dilution.
Full Explanation
Term sheets typically include: Investment Amount and Valuation (pre- and post-money); Stock Class and Rights (preferred stock with liquidation preference, participation rights, anti-dilution); Board Representation (investor gets 1 seat, founders typically have 2+ for early rounds); Protective Provisions (investor veto rights on major decisions like spending above budget, hiring above planned headcount, M&A); Anti-Dilution Provisions (broad-based weighted average or narrow-based; avoid full ratchet if possible); Opt-ion Pool (typical 15-20% for Series A); Drag-Along/Tag-Along Rights; Registration Rights (investor right to demand IPO registration); Information Rights (right to financial statements, board meetings); and Pro-Rata Rights (right to participate in future rounds). Term sheets are usually non-binding except for confidentiality and exclusivity (you cannot shop the deal to other investors for 30-45 days). Founders should engage a lawyer to review term sheets — seemingly minor terms can have enormous consequences. For example, full ratchet anti-dilution can make founders worthless in a down round; participating preferred can reduce founder exit proceeds by 50%+. Never skip legal review.
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Further Reading
LTV:CAC for Founders: The Ratio That Predicts Fundraising Success
LTV:CAC is the ratio investors use to determine whether your business model works. This guide explains how to calculate it correctly, the benchmarks by stage and business model, and why improving LTV:CAC signals intangible asset compounding.
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