What is a Term Sheet? Common Terms & Examples for Startups

Term sheets

Author: The Carta Team
Read time: 6 minutes
Published date: 11 July 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.

Contents

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, mergers and acquisitions, private equity deals, 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, a term sheet is often the first step in raising capital during funding rounds, especially a Series A and subsequent investments. When raising funds for a startup, 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:

In addition to the financial terms, a term sheet also details:

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 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. During this type of fundraise, an investor exchanges money for preferred stock in your company at a price per share determined by the valuation. Term sheets may be used during a seed round, but they are more common at the Series A round and beyond.

The 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) gives an investor the right to convert their investment into company shares in the future, once the valuation is known.

Term sheets are also often used for SAFE or convertible note rounds, but are used less frequently than for priced rounds because of the relative simplicity of SAFE and convertible note legal documents.

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 (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 (depending on how it is structured).

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 such as an M&A event, 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

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
  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.