A term sheet is the non-binding outline of a funding round, the summary of who invests, at what valuation, and on what terms, before the lawyers draft the binding documents. It splits into two buckets: economics (who owns what and who gets paid first) and control (who decides what). The headline valuation is only one line; a high number with an aggressive liquidation preference or a founder-unfriendly board can be worth less than a lower, clean offer. Read the whole sheet, and have a startup lawyer review it before you sign.
Most of a term sheet is standard boilerplate. The value is in knowing which few terms actually change your outcome, so you spend your negotiating capital there and don't get lost in the rest. This is the companion to the full SaaS fundraising guide; here we go term by term.
Binding or not?
A term sheet is mostly non-binding, it's an agreement to try to do a deal on these terms, not the deal itself. Two clauses usually are binding: exclusivity / no-shop (you agree not to shop the deal for a set window) and confidentiality. Signing doesn't guarantee the money; the binding financing docs come after diligence. But in practice a signed term sheet is a strong commitment on both sides, and re-trading terms afterward damages trust.
The economic terms
These decide who owns what and who gets paid first.
- Valuation (pre- and post-money) and amount. Together these set your dilution. Investor ownership is simply:
Investment ÷ Post-Money Valuation = Investor Ownership %$2M raised on a $10M post-money = 20% sold
Always confirm whether a number is pre- or post-money, it changes what you give up. Model the whole split in the dilution calculator before you agree.
- Option pool. Investors usually want 10–20% reserved for future hires. The catch is when it's created: a pool carved out pre-money dilutes you, not the investor. A "$10M pre-money" with a fresh 15% pool is really a lower effective valuation for the founders.
- Liquidation preference. Who gets paid first in an exit. 1× non-participating is the founder-standard: the investor takes the greater of their money back or their ownership share. Participating ("double dip") or a multiple (2×, 3×) are aggressive and can quietly transfer a lot of an exit away from founders and common holders.
- Anti-dilution. Protects investors if you later raise at a lower price (a down round). Broad-based weighted average is normal and mild; full ratchet is punitive, it reprices all their shares to the new low, and heavily dilutes founders.
- Dividends. Common at later stages; often non-cumulative and rarely paid in early venture rounds, but worth checking they're not cumulative.
The control terms
These decide who makes decisions after the money is in.
- Board composition. Who holds the seats after the round, founders, investors, independents. This is often more consequential than a point or two of valuation. Early on, keep the board balanced; don't hand investor control at seed.
- Protective provisions. A list of decisions that need investor approval (selling the company, raising more, changing share terms). Normal in scope, but read the list, an over-broad one can hand a veto over ordinary operating calls.
- Pro-rata rights. The investor's right to invest again to maintain their ownership in future rounds. Standard, and usually fine.
- Information rights. What reporting you owe investors and how often. Normal; just make sure it's reasonable for your stage.
The founder terms
- Founder vesting. Investors typically require founders' shares to vest over ~4 years (often with a 1-year cliff), so a co-founder who leaves early doesn't walk with a big stake. Standard, and usually in everyone's interest, negotiate credit for time already served.
- Drag-along / co-sale. Rules for what happens when shares are sold. Standard boilerplate; read but rarely a fight.
By stage: SAFE vs. a priced term sheet
At pre-seed and seed, most rounds don't use a full term sheet at all, they use a post-money SAFE (or a side letter), which defers valuation to the next priced round via a cap and/or discount. A full priced term sheet, with all the terms above, usually arrives at Series A, once there's a lead investor setting the price. If you're deciding how to structure early money, see SAFE vs convertible note.
Red flags to catch before you sign
- Participating or >1× liquidation preference, reaches into the founder/common share of an exit.
- Full-ratchet anti-dilution, brutal in a down round.
- A large pre-money option pool, a hidden discount to your valuation.
- Investor-controlled board at seed, giving up control too early.
- Over-broad protective provisions, a veto on everyday decisions.
A "higher" offer with any of these can be worth less than a lower, clean one. Compare the whole sheet, not the headline.
Frequently asked questions
What is a term sheet?
The non-binding outline of a funding round, valuation, amount, and the economic and control terms, that both sides agree to before the binding legal documents are drafted. Exclusivity and confidentiality clauses are usually the only binding parts.
Is a term sheet legally binding?
Mostly no, it's an intent to do a deal on these terms. The typical binding exceptions are the no-shop/exclusivity period and confidentiality. The binding financing documents come after diligence.
What are the most important terms for a founder?
Valuation and amount (they set dilution), the option pool and whether it's pre- or post-money, the liquidation preference, board composition, and anti-dilution. Economics and control both matter, don't optimize valuation alone.
What is a founder-friendly liquidation preference?
1× non-participating: the investor takes back the greater of their investment or their ownership share, but not both. Participating preferences and multiples above 1× are investor-favorable and can significantly cut the founder share of an exit.
Should I sign a term sheet without a lawyer?
No. A startup lawyer will catch aggressive or non-standard terms and is inexpensive relative to what a bad clause can cost. Have any term sheet reviewed before signing.
Model the deal in Adlega
The terms that set your ownership, valuation, amount, option pool, are exactly what the dilution calculator and cap table calculator make concrete. Adlega goes further, tying a round to your live model so you can see how the raise, the dilution, and the runway it buys move together, with the AI CFO explaining each number. Try Adlega free while it is in beta.
Related: the SaaS fundraising guide, SAFE vs convertible note, SaaS valuation, and equity basics.