Term Sheet
A term sheet is a one- to three-page summary of the commercial terms of a proposed deal — price, structure, conditions, governance — set out as a list rather than as a contract, and signed as a basis for drafting the binding documents. In venture rounds it carries the investor's protective terms; in M&A it plays the role of the letter of intent.
- Also known as
- Heads of agreement, Indicative terms
- Used at
- the end of negotiation, before lawyers draft the full agreements
- Binding
- not on the deal; confidentiality and exclusivity clauses usually are
- Typical length
- 1–3 pages, in table or bullet form
- Where it is used
- every venture round; M&A where the parties prefer a table to a letter
- Parties
- investor(s) and company, or buyer and seller
How a term sheet works in practice
A term sheet turns a conversation into a list somebody can say yes or no to. For a fintech raising a Series A it names the pre-money valuation, the amount being raised, the share class and its liquidation preference, whether the preference participates, the anti-dilution mechanism, board seats, information rights, the option pool and its size before or after the money, and the vesting of founder shares. Each line is a term that lawyers will later expand into pages, and each is the place where the negotiation actually happens: once the term sheet is signed, the long-form documents are expected to follow it, and a change at that stage is a re-trade.
In an acquisition the same document lists the enterprise value, the bridge to equity value, the cash, shares and earn-out, the escrow, the warranty cap and the conditions to closing. Payment and e-money businesses add a line the software company does not have: regulatory approval as a condition precedent, with a long-stop date after which either side may walk away.
The value of the term sheet is that it is short. A reader who cannot find the price, the preference and the control terms on one page is reading a document that is hiding something in its length.
Two lines deserve more attention than they get. The liquidation preference decides who is paid first, and how much, when the company is sold for less than everyone hoped, which for most fintechs is the realistic outcome to plan for. The anti-dilution clause decides what happens to the investor's percentage in a down round — a full ratchet can hand an investor a majority after one bad year, where a weighted-average adjustment moves a few points. Both are usually accepted as "standard" and both are negotiable.
Example
A Series A term sheet for a lending platform: £6m raised at a £24m pre-money valuation, so the investor takes 20% post-money. Preference shares carry a 1× non-participating liquidation preference, weighted-average anti-dilution, one board seat for the lead investor, a 10% option pool created before the round (so paid for by the founders' dilution, not the investor's), and four-year founder vesting with a one-year cliff. The company's counsel drafts a subscription agreement and new articles from those eight lines; the round closes six weeks later.
Common mistakes
- Negotiating the valuation and accepting every other line unread — the preference and the pool move more money than the headline number. - An option pool sized after the money when the term sheet says before it, which costs the founders several points of ownership. - Signing exclusivity to one investor before the other term sheets have arrived. - Believing a signed term sheet is a closed round: until the money is in the bank, it is a plan. - Leaving the regulatory condition off a term sheet for a licensed business, and discovering it at drafting.