Term sheet basics

A term sheet is a short document, often only a few pages, that sets out the main terms of an investment before lawyers draft the full agreements. Founders tend to focus on the valuation. Experienced investors look just as hard at the terms that decide who gets paid first, who controls the board and what happens in the next round. This page explains those terms in plain English with simple, made-up numbers.

This page is general information, not legal or financial advice; have a qualified startup lawyer review any term sheet before you sign it. For short definitions of every term below, see our venture capital glossary.

What a term sheet does

A term sheet turns a handshake into a written outline. It usually covers four areas:

1. Economics. How much money, at what price and with what preferences.
2. Control. Board seats, voting rights and decisions that need investor approval.
3. Future rounds. Pro rata rights, anti-dilution protection and option pool size.
4. Process. Confidentiality, a no-shop period and conditions to close.

Most of a term sheet is nonbinding. The binding parts are typically limited to confidentiality, a no-shop clause that stops you from shopping the deal for a set period and sometimes expenses. Once you sign, both sides spend weeks turning the outline into full documents.

Valuation: pre-money and post-money

Valuation sets the price per share. Two numbers matter:

• Pre-money valuation is what the company is worth just before the new money comes in.
• Post-money valuation is pre-money plus the new investment.

A simple example: an investor puts $2 million into a company at an $8 million pre-money valuation. The post-money valuation is $10 million. The investor owns $2 million divided by $10 million, or 20 percent. Everyone who owned shares before now owns 20 percent less of the company in proportion. That reduction is dilution.

The option pool shuffle

Term sheets often require the company to create or enlarge an employee option pool as part of the round. If the pool is counted in the pre-money valuation, the new shares for the pool dilute only the existing holders, not the new investor. The effect is a lower real price for the founders than the headline number suggests. Ask how the pool is calculated and whether its size matches an actual hiring plan.

Liquidation preference

A liquidation preference decides who gets paid first when a company is sold, merged or wound down. Venture investors usually buy preferred stock that carries this right.

Using the earlier example, suppose the company sells for $5 million. With a 1x non-participating preference, the investor can take its $2 million first, since 20 percent of $5 million would be only $1 million. The common holders split the remaining $3 million. In a large sale, say $100 million, the investor would convert and take 20 percent, or $20 million. Preferences matter most when outcomes are modest.

Pro rata rights

A pro rata right lets an investor buy enough shares in future rounds to keep its ownership percentage. If a seed investor owns 10 percent and the company raises a Series A, a full pro rata right lets it buy up to 10 percent of the new round. It is valuable to investors and generally reasonable for founders. Watch for "super pro rata" rights that allow an investor to increase its stake, which can crowd out new lead investors.

Board seats and control

The board approves budgets, hires and fires the CEO and signs off on a sale. Early boards are small. A common pattern after a Series A is two founder seats and one investor seat, or two founders, one investor and one independent director. Every seat matters, so count carefully as you raise more rounds.

Term sheets also list protective provisions. These are decisions the company cannot make without approval from preferred shareholders, such as selling the company, issuing a more senior class of stock or changing the size of the board. Some are standard. A long list can slow the company down.

Other terms to read closely

• Anti-dilution. Broad-based weighted average is the norm. Full ratchet is harsh and rare.
• Vesting for founders. Investors often ask founders to re-vest some shares. Negotiate credit for time already served.
• Drag-along. Lets a majority force a sale. Check who counts as the majority.
• Information rights. Normal for major investors, but limit them for strategic or corporate investors. See our corporate venture capital guide.

SAFEs and the post-money SAFE

Most early rounds in Silicon Valley now skip a full term sheet and use a SAFE, short for Simple Agreement for Future Equity. Y Combinator says Carolynn Levy created it there in 2013. An investor pays now and receives shares later, when the company raises a priced round. There is no interest and no maturity date, which makes it simpler than a convertible note.

In 2018 YC moved to a post-money SAFE. In the original version, the valuation cap was measured before the SAFE money was counted, so founders who raised several SAFEs could struggle to tell how much of the company they had sold. In the post-money version the cap includes the SAFE money. YC says the biggest advantage is that "the amount of ownership sold is immediately transparent and calculable." A $1 million SAFE with a $10 million post-money cap converts into about 10 percent of the company, before the dilution from the next priced round.

YC's U.S. forms come in several versions:

• Valuation cap only. Converts at the lower of the cap or the next round's price.
• Discount only. Converts at a discount to the next round's price.
• Uncapped MFN. No cap and no discount, but the investor can claim better terms given to later SAFE investors.
• Pro rata side letter. An optional add-on giving the investor a right to join a future round.

Download the forms and the user guide from Y Combinator's documents page. YC also offers versions for companies in Canada, the Cayman Islands and Singapore.

The NVCA model documents

Most U.S. venture rounds start from a common set of templates published by the National Venture Capital Association. The NVCA model legal documents are free to download and include a term sheet, certificate of incorporation, stock purchase agreement, investors' rights agreement, voting agreement and right of first refusal and co-sale agreement. NVCA released updates to five of them in October 2025, adding mechanics for tranched financings and reflecting recent regulations. The voting agreement and the right of first refusal and co-sale agreement were revised again in 2026.

The NVCA itself says the documents are a starting point to be tailored and are not legal advice for any particular situation. They are useful even if your investor uses its own forms, because they show what "standard" looks like.

Negotiating sensibly

1. Get a startup lawyer early. Experienced startup lawyers see many of these deals and know what is normal in the current market.
2. Pick your battles. Liquidation preference, board composition and option pool size usually matter more than small wording changes.
3. Model the outcomes. Run the numbers for a small sale, a medium sale and a large one.
4. Keep the relationship in mind. Your lead investor will likely sit on your board for years.
5. Mind the no-shop. Once signed, you usually cannot talk to other investors for a set period, so be sure before you sign.

Many founders negotiate these terms in person on Sand Hill Road or downtown Palo Alto. Our guide to pitching investors covers the steps before a term sheet arrives. Our seed funds guide explains who writes the earliest checks. If you are flying in to close a round, compare hotels near Sand Hill Road so you are close to your investor's office.

Frequently asked questions