Understanding Term Sheets

You’ve lined up interested investors, the pitch went well, and now someone wants to send you a term sheet. This is a big moment. But before you sign anything, it helps to understand what’s really on the table. Here’s a quick overview to help you understand what typically shows up in a term sheet and how to think about it, clear enough to be useful, without dragging things out with unnecessary complexity.

What exactly is a term sheet?

A term sheet is a non-binding document outlining the key terms of a proposed investment. Think of it as a roadmap for your deal. It doesn’t guarantee funding, but it sets the framework for negotiation and the final legal agreements (like the shareholders’ agreement and investment agreement). At its core, a term sheet tries to balance two key areas: economics (who gets what in terms of money) and control (who gets to decide what happens). Economics covers things like valuation, liquidation preferences, and anti-dilution, all about financial outcomes. Control shows up in governance terms like board structure, veto rights, and voting thresholds. Founders should evaluate both sides carefully. A generous valuation can be undercut by tight control provisions, and vice versa. The best deals usually reflect a healthy balance between investor protections and founder flexibility.

How long should a term sheet be? There's no single answer. Some run just a page or two, others stretch longer. The key is finding a balance: it should be clear and structured enough to reflect the future long-form agreements, but not so overloaded with detail that it slows things down or causes confusion. A well-drafted term sheet helps both parties align quickly on the main commercial and governance points without getting bogged down in legal fine print too early.

Tip: While term sheets aren’t legally binding overall, certain clauses (like confidentiality and exclusivity) usually are. Don’t assume you can ignore them once signed.

Valuation and investment amount

This is usually the first headline number in any term sheet along with the type of security, and issue price: the pre-money valuation and the amount the investor plans to invest. Together, they determine the percentage of equity you’re giving up.

Tip: Understand how the valuation impacts dilution and future rounds. A higher valuation means giving up less equity, but it also sets expectations for future growth. Also, check whether the valuation is pre-money or post-money, this affects how much of the company the investor actually ends up owning. For example, a CHF 5 million pre-money valuation with a CHF 1 million investment gives away 16.7%, while a CHF 5 million post-money valuation gives away 20%. That difference matters. Valuation is often expressed on a fully diluted basis, which means taking into account not only existing shares but also all shares that could be created from options, warrants, or convertible instruments. For example, if your company has 1,000,000 outstanding shares today and you issue 200,000 options under an ESOP, investors will calculate their ownership based on 1,200,000 shares. In practice, that means their percentage ownership will be lower than if calculated on an outstanding-shares-only basis. Depending on the term sheet, the ESOP pool is sometimes expanded before the investment, which can shift dilution more heavily onto founders than investors.

Liquidation preference

Investors will usually include a liquidation preference, which dictates how they get paid back in the event of an exit (such as a sale of the company or IPO). A typical preference is 1x non-participating, meaning the investor gets their money back first, but only if their pro-rata share of the exit proceeds would otherwise give them less than their original investment. If the exit price is high enough that their equity stake alone would already return at least their initial investment, the preference provides no extra benefit.

Tip: Participating preferences ("double-dip") and multiples above 1x can significantly affect how exit proceeds are distributed. From a founder's perspective, they may reduce the upside in a successful exit. From an investor's view, these terms offer downside protection, especially in higher-risk deals. Whether such terms are appropriate depends on the stage, valuation, and broader deal dynamics.

Board structure and governance

Term sheets often set out how the board will look post-investment. This includes the number of seats, who appoints them, and what kind of decisions require board or investor consent. These consent rights typically cover major decisions, such as raising additional capital, selling the company, or changing the business model, and are designed to ensure alignment on key strategic moves. The scope of these rights varies, and both parties should aim for a setup that protects key interests without creating operational bottlenecks.

Tip: It’s common for investors to seek a board seat as part of their role in supporting and overseeing the company’s growth. At the same time, founders should ensure that board and consent structures remain workable and aligned with the company’s stage. Clear expectations and balanced governance help avoid decision-making bottlenecks while keeping both sides comfortable with their level of involvement. 

Founder vesting and employment terms

Even if you’ve been building for years, investors often require founders to “re-vest” their shares over time. This isn’t just about investor protection, it’s also a way to safeguard the company and the remaining co-founders if someone exits early. By tying equity to continued involvement, vesting helps maintain fairness, preserve motivation, and support long-term team stability. It benefits the company and co-founders by ensuring that equity is earned over time. This helps promote commitment, fair ownership distribution, and long-term alignment among the founding team.

Tip: Typical vesting schedules are four years with a one-year cliff. What's considered fair can vary depending on the context, so it's worth discussing any terms that feel unusually restrictive or misaligned with the founders' or investors' expectations.

Anti-dilution provisions

Investors often include anti-dilution clauses that protect their share of the company if you raise future rounds at a lower valuation. The most common is broad-based weighted average anti-dilution. It’s generally viewed as a middle-ground approach because it adjusts the conversion price of preferred shares in a down round based on both the size and price of the new issuance. This offers investors some protection without unduly penalizing founders or early shareholders. It’s widely accepted because it balances fairness and predictability, especially in early and growth-stage financings.

Tip: Full-ratchet anti-dilution provisions can have a significant impact on ownership dynamics, especially in down rounds. They offer stronger protection for investors but may lead to substantial dilution for founders. Whether this clause is appropriate often depends on the specific circumstances, including market conditions, company stage, and perceived risk. It's worth evaluating case by case.

Warranties and due diligence

A term sheet may briefly reference representations and warranties you’ll be required to make in the final agreements. These are essentially confirmations about the state of the company, including your finances, legal standing, IP ownership, and compliance with laws. They become legally binding in the long-form documents. Expect a standard due diligence process to follow, where you'll need to present clear and well-organized documentation. This usually includes your financials, corporate records, contracts, cap table, IP assignments, and regulatory filings. While due diligence is thorough, it’s not adversarial, it’s a process designed to confirm that everything is as presented and to surface any potential risks early. It also gives founders a chance to get clarity on their own internal processes and legal setup, often prompting improvements that benefit the company regardless of the investment outcome. Treating it as a constructive health check can reveal gaps or inefficiencies that are easier to fix early than later under pressure.

Tip: Make sure your house is in order (corporate documents, IP assignments, employment contracts, taxes). If you're operating in a regulated industry, like fintech, medtech, or anything involving data infrastructure or financial services, you'll also need to show that you're aware of, and on track with, any regulatory requirements. This might include licenses, approvals, or filings with supervisory authorities like FINMA in Switzerland. Regulatory preparedness is often viewed as a risk reducer and can strengthen investor confidence. It's also a signal that you're building with compliance in mind, which protects not only investors but also the long-term viability of the business. Surprises here can slow down or complicate the deal process. For example, if your IP assignments from a former contractor aren't clearly documented, it might delay the legal review or raise concerns about who owns key assets. Investors and founders alike benefit from smooth, predictable due diligence.

Exclusivity and confidentiality

Term sheets often include a clause preventing the startup from shopping the deal around to other investors for a set period. This helps the investor justify the time and cost of due diligence. Exclusivity also brings clarity and focus for the startup. It helps move both sides toward a decision efficiently and reduces the distraction of parallel negotiations. When well-calibrated (not too long or open-ended), it can actually speed up closing the round.

Tip: Exclusivity periods of 30–60 days are common and are intended to give investors confidence that they can proceed with due diligence without competition. That said, excessively long exclusivity can limit a founder's flexibility in a dynamic fundraising environment. The appropriate length depends on the specifics of the deal and the expectations on both sides.

Every term sheet tips the scale, the art is keeping it level.

Final Thought:

A term sheet isn’t just about the money, it’s the starting point for how you and your investors will work together. Knowing what’s standard, what’s negotiable, and what’s potentially problematic helps you build trust and protect your long-term interests.

We’ve focused on the key terms that show up in most term sheets. Depending on the deal, you might also come across other important elements, like ESOPs, share transfer and exit rights, detailed information rights (e.g. access to budgets or regular financial updates), specifics around use of proceeds, dividends, founder roles and compensation, or how future funding rounds will be handled from a rights and process perspective.

We’ll cover the details of certain terms (including liquidation preferences, anti-dilution, board rights, and more) in upcoming posts. If you’re dealing with term sheet negotiations now or preparing for your first round, let’s talk.