A term sheet is a short document outlining the key terms of a proposed investment before the full legal agreements are drafted. Most of it is non-binding, but it sets the framework the entire deal gets built on. Getting the term sheet wrong makes everything after it harder to fix.

What a term sheet actually contains

A typical startup term sheet covers the valuation, how much money is being invested, what type of equity the investor receives, board seats, voting rights, liquidation preferences, and any protective provisions the investor wants, like anti-dilution rights. It’s usually just a few pages, meant to summarize the deal’s shape before lawyers spend weeks drafting full legal documents.

Why most of it isn’t legally binding

With a few exceptions, like confidentiality and exclusivity clauses, most term sheet provisions are intentionally non-binding. That gives both sides room to walk away if due diligence turns up something concerning, without either party being on the hook for a deal that was only preliminarily agreed to.

Why it still matters enormously

Even though it’s mostly non-binding, a signed term sheet represents a strong mutual intention to close the deal on roughly those terms, and renegotiating major points after signing one is considered a serious breach of trust in the venture world. Founders who don’t carefully understand every term, especially around liquidation preferences and board control, often regret it much later when those terms actually get enforced in the final contracts.

Frequently asked questions

Is a term sheet a binding contract?

Mostly no, except for specific clauses like confidentiality and exclusivity, which usually are binding.

What happens after a term sheet is signed?

The parties move into due diligence and drafting of the full legal agreements based on the term sheet’s framework.

Can either side walk away after signing a term sheet?

Generally yes, since most terms are non-binding, though doing so without good reason can damage trust and reputation in the investment community.

For more startup fundamentals, see Talmyn’s Business & Economics desk.