A term sheet is a short document that lists the main terms of a deal before the full legal contracts are written. In startup funding, it sets the price an investor pays, how much of the company they get, and what rights come with their shares.
Most term sheets run two to ten pages. They are mostly non-binding, but a few clauses do bind both sides from the day of signing.
What is a term sheet in business?
A term sheet is a summary of the proposed terms for a transaction. Lawyers use it as the outline for the final agreements, which can run to hundreds of pages.
The term sheet lets both sides agree on the big points first. If they cannot agree on price or control, they stop before paying large legal bills.
Who uses a term sheet
Venture capital firms use term sheets most often. A startup raising a priced round, such as a Series A, will receive one from the lead investor. Our breakdown of how Series A and Series B rounds differ covers the round sizes those term sheets usually describe.
Term sheets also appear in bank loans, real estate leases, joint ventures, and acquisitions. In mergers, the same type of document is often called a letter of intent. The structure differs between venture capital and private equity deals, but the purpose is the same.
Is a term sheet legally binding?
Most of a venture capital term sheet is not binding. Price, board seats, and investor rights only become binding when the parties sign the final stock purchase agreement and related documents.
The model term sheet from the National Venture Capital Association (NVCA) makes three sections binding at signing. These cover legal fees and expenses, the no-shop and confidentiality clause, and governing law.
The no-shop clause stops the startup from seeking other investors for a set number of days. The NVCA model leaves that number blank for the parties to fill in.
Key terms in a venture capital term sheet
Term sheet clauses fall into two groups. Economic terms decide who gets paid and how much. Control terms decide who makes decisions.
Valuation and price per share
The pre-money valuation is what the company is worth before the new money comes in. Add the investment and you get the post-money valuation.
Take a startup with a $60 million pre-money valuation and 6 million fully diluted shares. Each share is priced at $10. An investor who puts in $15 million buys 1.5 million shares and owns 20% of the $75 million post-money company.
Carta’s Q2 2026 data put the median Series A at $14.7 million on a $76.3 million post-money valuation, according to AI Funding Tracker’s review of those benchmarks.
Liquidation preference
A liquidation preference decides who gets paid first when the company is sold or shut down. A 1x preference means investors get their money back before common shareholders receive anything.
With a non-participating preference, the investor takes either the money back or their ownership share of the sale price, whichever is larger. With a participating preference, the investor gets the money back and then also takes a share of what is left.
The table below uses the $15 million, 20% investment from the earlier example.
| Sale price | Investor payout (1x non-participating) | Investor payout (1x participating) | Left for founders and others (participating) |
|---|---|---|---|
| $50 million | $15 million | $22 million | $28 million |
| $75 million | $15 million | $27 million | $48 million |
| $200 million | $40 million | $52 million | $148 million |
At a $200 million sale, the non-participating investor converts to common stock and takes 20%. The participating investor collects $12 million more than that.
Anti-dilution protection
Anti-dilution clauses protect investors if the company later sells shares at a lower price. This is called a down round.
Full ratchet resets the investor’s price to the new, lower price. Weighted average adjusts the price based on how many new shares are sold, so the change is smaller for founders. Carta recorded a down-round rate of 11.4% in Q1 2026, down from about 22% in 2023.
Board seats and protective provisions
The term sheet sets the size of the board and who picks each seat. A common Series A board has two founder seats and one investor seat, though this varies by deal.
Protective provisions give preferred shareholders a veto over certain actions. These often include selling the company, issuing new senior shares, or changing the company charter.
Option pool
The option pool is the set of shares held back for future employee grants. Investors often ask for the pool to be created or enlarged before their money comes in, which means existing holders absorb the dilution.
Carta suggests founders can start the pool at 8% to 10% of equity and expand it in later rounds.
Other common clauses
- Pro rata rights let investors buy into future rounds to keep their ownership level.
- Drag-along rights force minority holders to join a sale approved by the majority.
- Information rights require the company to share financial statements on a set schedule.
- Founder vesting puts founder shares on a time-based schedule, often four years.
Term sheet trends: how often investor-friendly terms appear
The share of term sheets with participating preferred stock rises and falls with the funding market. Carta recorded it at 4.8% of rounds in Q4 2021. It jumped to 15.6% in Q1 2023 as funding tightened, then fell to 4.1% in Q3 2024, the lowest quarterly rate of the decade at that point.
The rate climbed again after that. Carta reported participating preferred in 7.3% of rounds in Q3 2025. In the same quarter, 5.7% of rounds had a preference multiplier above 1x and 5.1% had cumulative dividends.
Carta’s Q3 2026 report, published November 5, 2026, showed participating preferred in more than 10% of rounds, the highest rate in six years, according to a summary by The Fund CFO newsletter.
How a term sheet affects founder ownership
Each priced round sells part of the company. Carta’s Q2 2026 medians showed dilution of 19.4% at seed, 18.7% at Series A, and 13.4% at Series B.
| Round | Median dilution (Q2 2026) | Median founding team ownership after round |
|---|---|---|
| Seed | 19.4% | 56.2% |
| Series A | 18.7% | 36.1% |
| Series B | 13.4% | 23.0% |
Ownership figures come from Carta’s Founder Ownership Report 2026. They include the effect of option pools and convertible instruments, which is why founder stakes fall faster than round dilution alone suggests.
Founders who want to model these numbers before signing can use our guide to tracking equity on a startup cap table.
Term sheet vs letter of intent vs SAFE
These three documents are often confused. A term sheet and a letter of intent both outline a future deal. A SAFE is the deal itself.
| Document | Main use | Binding? | Sets a share price? |
|---|---|---|---|
| Term sheet | Priced equity rounds, loans | Mostly no | Yes |
| Letter of intent | Mergers and acquisitions | Mostly no | Sets a purchase price |
| SAFE | Pre-seed and seed rounds | Yes | No, converts later |
Early rounds often skip the full term sheet. Carta data shows 93% of pre-seed rounds in Q2 2026 used SAFEs. Many firms on our list of active seed investors in AI write SAFEs at that stage and switch to term sheets for priced rounds.
What happens after a term sheet is signed
Signing starts the closing process. The investor runs due diligence on the company’s finances, contracts, intellectual property, and legal standing.
Lawyers for both sides then draft the final documents. In a US venture deal, these usually include the stock purchase agreement, an amended certificate of incorporation, an investors’ rights agreement, a voting agreement, and a right of first refusal and co-sale agreement.
A signed term sheet does not guarantee the money. Deals can still fall apart if diligence turns up problems or if market conditions change before closing.
FAQ
What is a term sheet in simple words?
A term sheet is a short, mostly non-binding document that lists the main terms of a deal, such as price, ownership, and investor rights. It guides lawyers when they draft the final, binding contracts.
Is a term sheet legally binding?
Mostly no. The NVCA model term sheet makes only three parts binding at signing: legal fees and expenses, the no-shop and confidentiality clause, and governing law. Economic and control terms bind only after final documents are signed.
What is the most important clause in a term sheet?
Valuation and liquidation preference have the biggest effect on payouts. Valuation sets how much of the company investors buy. Liquidation preference sets who gets paid first, and how much, when the company is sold.
How long does it take to close after signing a term sheet?
Timing depends on due diligence and legal drafting. The no-shop period in the term sheet sets how long the startup must stop talking to other investors while the deal moves toward closing.
What is the difference between a term sheet and a SAFE?
A term sheet outlines a priced round and is mostly non-binding. A SAFE is a binding agreement that gives investors future shares without setting a price. Carta found 93% of pre-seed rounds used SAFEs in Q2 2026.
