# Term sheets Author: The Carta Team Read time: 6 minutes Published date: July 11, 2025 A term sheet outlines the key terms of a startup investor’s offer. Learn how to read an investor term sheet before your next fundraising round. ## What is a term sheet? A term sheet is a preliminary document outlining the key terms and conditions of a potential business agreement, typically used in [venture capital investments](https://fund-forecasting@carta.com/learn/private-funds/venture-capital/), [mergers and acquisitions](https://fund-forecasting@carta.com/learn/startups/exit-strategies/mergers-acquisitions/), [private equity deals](https://fund-forecasting@carta.com/learn/private-funds/private-equity/), and real estate transactions. It serves as the basis for future negotiations before drafting more detailed legal paperwork if the deal is pursued. For [early-stage startups](https://fund-forecasting@carta.com/learn/startups/), a term sheet is often the first step in raising capital during funding rounds, especially a [Series A](https://fund-forecasting@carta.com/learn/startups/fundraising/series-a/) and subsequent investments. When [raising funds for a startup](https://fund-forecasting@carta.com/learn/startups/fundraising/), the lead investor will use a term sheet to outline the key points of their offer to invest in a company. The term sheet establishes financial terms of the deal, including: - [**Pre-money vs. post-money valuation**](https://fund-forecasting@carta.com/learn/startups/equity-management/private-company-valuations/pre-money-vs-post-money-valuations/): The startup's valuation before the new investment and after, respectively. - **Total investment amount**: The amount of capital an investor commits to the company in exchange for equity. - [**Option pool size**](https://fund-forecasting@carta.com/learn/startups/equity-management/option-pool/): The amount of [company equity](https://fund-forecasting@carta.com/learn/equity/) allocated for future employees and service providers. - **Ownership structure**: How the new equity ownership will be reflected in the company’s [cap table](https://fund-forecasting@carta.com/learn/startups/equity-management/cap-table/). In addition to the financial terms, a term sheet also details: - **Economic rights**: Includes liquidation preferences, pro rata rights, and anti-dilution provisions. - **Control rights**: Includes provisions for voting rights, board seats, right of first refusal, and [drag-along rights](https://fund-forecasting@carta.com/learn/private-funds/management/drag-along-rights/). The term sheet is usually the first time an investor will formally declare their interest in investing in a company, and serves as a starting point for negotiations. A term sheet typically includes clauses for confidentiality, exclusivity (no-shop clause), and good faith negotiation. The document is usually drafted with the assistance of legal counsel to ensure clarity, compliance, and [due diligence](https://fund-forecasting@carta.com/learn/private-funds/management/deal-flow/due-diligence/) with important terms. This prevents miscommunication and helps both parties determine if they want to move forward before incurring additional legal expenses to continue negotiations towards a definitive agreement. ## When are term sheets used? Term sheets are typically used when a startup is raising a round of financing at a specific valuation, known as a [priced round](https://fund-forecasting@carta.com/learn/startups/fundraising/priced-rounds/). During this type of fundraise, an investor exchanges money for [preferred stock](https://fund-forecasting@carta.com/learn/equity/common-stock-vs-preferred-stock/) in your company at a price per share determined by the valuation. Term sheets may be used during a [seed round](https://fund-forecasting@carta.com/learn/startups/fundraising/seed-funding/), but they are more common at the [Series A round](https://fund-forecasting@carta.com/learn/startups/fundraising/series-a/) and beyond. The [valuation](https://fund-forecasting@carta.com/learn/startups/equity-management/409a-valuation/) is one of the most important elements of a term sheet and distinguishes it from similar documents, such as SAFEs, which are used in earlier funding rounds when your company’s valuation is not yet known. A [SAFE (Simple Agreement for Future Equity)](https://fund-forecasting@carta.com/learn/startups/fundraising/convertible-securities/safes/) gives an investor the right to convert their investment into company shares in the future, once the valuation is known. ## Term sheet examples: What’s included? Along with setting the valuation for the company, a term sheet details the amount of the investment and detailed terms around the calculations of pricing for the preferred shares the investor will receive for their money. A term sheet also establishes the investor‘s rights. ### Pricing terms The offering terms may detail the following information: 1. The investor’s suggested pre-money valuation (how much the company was worth before the investment) or the post-money valuation (how much the company is worth with the new investment added) 2. The raise amount (how much they are investing) 3. The target size of the available [employee equity pool](https://fund-forecasting@carta.com/learn/startups/equity-management/option-pool/) (the portion of company shares reserved for issuance of stock options in new-hire grants or refresh, top-up, or retention grants) The option pool can significantly affect the price of company shares sold in the preferred stock round and can be used as a lever for investors to lower the price per share and [minimize future dilution](https://fund-forecasting@carta.com/learn/startups/equity-management/share-dilution/) (depending on [how it is structured](https://fund-forecasting@carta.com/learn/resources/option-pool-calculator/)). ### Economic rights Holders of preferred stock will receive certain economic investor rights. These include: 1. **Liquidation preference:** the right to receive their money back first in an [exit event](https://fund-forecasting@carta.com/learn/startups/exit-strategies/) such as an [M&A event](https://fund-forecasting@carta.com/learn/startups/exit-strategies/mergers-acquisitions/), [IPO](https://fund-forecasting@carta.com/learn/startups/exit-strategies/ipo/), or liquidation/wind-down of the company 2. **Pro rata rights (also known as participation rights or pre-emptive rights):** the right to invest in a future round of financing to maintain their ownership level 3. **Anti-dilution protection:** a price adjustment in case of a future [down round](https://fund-forecasting@carta.com/learn/startups/fundraising/down-rounds/) ### Control rights Venture capital (VC) investors typically require certain control rights as well. These include: 1. **Investor board seat**: the lead investor will usually take a [board seat](https://fund-forecasting@carta.com/learn/startups/private-companies/board-of-directors/) 2. **Preferred stockholder veto rights (also known as protective provisions)**: What decisions will need investors’ permission to make? 3. **Waiver and amendment provisions (for the financing documents)**: could affect investors’ ability to block a future financing round 4. **Right of first refusal (ROFR) and co-sale rights on common stock transfers**: right to purchase stock first if a founder or other large common stockholder tries to sell to a third party, or to sell alongside them 5. **Drag-along rights**: making sure no large stockholder can cause a holdout problem if the board and stockholders are otherwise aligned on selling the company to an acquirer While all elements of a term sheet are important, some are more standardized while others are more commonly negotiated. A lawyer can help negotiate your term sheets.