3.4 VC Term Sheets
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Understanding VC Term Sheets
A term sheet is one of the most important documents in the venture capital process — it signals serious intent from both the investor and the founder.
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Although non-binding, a term sheet lays out the core deal terms that will eventually be turned into long-form legal agreements.
Understanding the basics of a term sheet is critical for anyone looking to raise or invest in venture capital.
What is a Term Sheet?
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A short (usually 2–10 page) document
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Summarizes key deal terms before legal documents are drafted
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Acts as a roadmap for negotiation and closing
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Divided into Economic Terms and Governance Terms
Key Economic Terms
These define how the money works — who gets what, when, and how.
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Investment Amount & Valuation
Specifies how much is being invested and at what valuation. This determines the investor’s ownership in the company.
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Option Pool / Employee Share Reserve
Equity reserved for future hires, usually set aside before the investor puts money in — which dilutes the founders, not the investor.
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Liquidation Preference
Gives investors the right to get their money back before others in an exit. Standard is 1× non-participating, but more aggressive terms exist.
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Anti-Dilution Protection
Protects investors from losing value in down rounds. Common formulas include “weighted average” or the more aggressive “full ratchet.”
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Pro Rata Rights
Allows investors to maintain their ownership by investing in future rounds.
Key Governance Terms
These define how control is shared and decisions are made.​
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Board Structure
Outlines who will sit on the company’s board — often a mix of founders, investors, and independent members.
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Voting Rights & Protective Provisions
Gives investors veto power over major decisions such as raising additional capital, selling the company, or changing the charter.
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Information Rights
Entitles investors to regular financial and operational updates from the company.
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Founder Vesting
In some cases, founder shares are subject to vesting to ensure long-term commitment.
Investment Committee Approval
At most VC firms, term sheets aren’t issued lightly. Before a term sheet is sent, it’s usually approved by the firm’s Investment Committee — a group of senior partners who evaluate the deal’s merits and risks.
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Even though a term sheet is technically non-binding, it’s a serious milestone in the venture capital process.
What Happens After a Term Sheet?
Once the term sheet is signed:
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Legal counsel drafts the full investment documents
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Final due diligence is conducted
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The deal is closed once all documents are signed and funds are transferred
Term Sheet Templates and Resources
Here are some high-quality, publicly available resources featuring deal memo examples and templates—ideal for emerging GPs, analysts, or anyone curious how VCs structure these key documents:
GoingVC – The Ultimate Guide to Venture Capital Term Sheets (2024)
A clear walkthrough of key term sheet elements, including valuation, liquidation preferences, anti-dilution, and pro rata rights. Great for founders and first-time investors.
SVB – Understanding Venture Capital Term Sheets
A practical primer that covers essential VC term sheet clauses, what’s standard versus negotiable, and tips for negotiation.
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Carta – Term Sheets for Startups: Uses & Examples (July 2025)
Includes downloadable templates and breakdowns of both economic and governance terms in plain English.
Airtree Ventures – Seed-Stage Term Sheet Template
A free, founder-friendly seed-stage term sheet template with plain‑English explanations and standard founder‑balanced terms.
HSBC Innovation Banking – Venture Capital Term Sheet Guide 2025
Data-rich analysis of over 500 anonymized term sheets from 2024, offering insights into market norms, protections, and recent trends.
