- Term sheets: Key terms and how to negotiate
- What is a term sheet?
- Is a term sheet legally binding?
- When are term sheets used?
- What's included in a term sheet?
- Pricing terms
- Economic rights
- Control rights
- How to negotiate a term sheet
- What happens after you sign a term sheet?
- Due diligence
- Definitive agreements
- Closing
- Term sheet vs. other fundraising documents
- Download our term sheet template
What is a term sheet?
A term sheet is a preliminary, nonbinding document that outlines the key financial terms and conditions of a potential investment, used across venture capital, mergers and acquisitions, private equity, and real estate. 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 marks the first step toward raising capital, most often a Series A round and beyond. The lead investor uses it to outline the key terms of their offer, including:
Pre-money vs. post-money valuation: The startup's valuation before the investment and after.
Investment amount: The capital committed in exchange for equity.
Option pool size: Equity allocated for future employees and service providers.
Ownership structure: How equity ownership is recorded on the cap table.
In addition to the financial terms, a term sheet also details:
Economic rights: Includes liquidation preferences, pro rata rights, and anti-dilution provisions.
Control rights: Includes provisions for voting rights, board seats, right of first refusal, and drag-along rights.
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.
In this video, startup attorney Mike LaPlante breaks down the first section of a Series A term sheet: the offering terms.
Is a term sheet legally binding?
A term sheet is mostly nonbinding. In most cases, it functions as a framework for negotiation rather than a contract that obligates either side to complete the investment. Either party can generally walk away before the definitive agreements are signed, which is exactly why the document exists: it lets you and an investor align on the big terms before spending on full legal drafting.
A few clauses are binding from the moment you sign:
Confidentiality: Neither side can publicly share the deal terms or sensitive information exchanged during negotiation.
Exclusivity (no-shop): For a defined window, you agree not to solicit or negotiate competing offers from other investors.
Good-faith negotiation: Both sides commit to working toward a definitive agreement in good faith.
Valuation, economic rights, and control rights are a letter of intent, not a final obligation. Those terms become binding only when they're written into the definitive agreements at closing, chiefly the stock purchase agreement, which is the contract that actually executes the deal and moves the money.
Because the binding exceptions carry real legal weight, read them carefully before you sign. An open-ended no-shop clause, for example, can lock you out of other conversations for longer than you'd like. Having a lawyer review the term sheet helps you understand which commitments start immediately and which remain open for negotiation.
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.
A term sheet prices a round at a specific valuation, which is where the real numbers come in. As of Q2 2026, the median Series A was priced at an $76.3 million post-money valuation on $14.7 million raised, with founder dilution around 18.7%, lower than at any point in the past few years. Those figures show what a priced Series A term sheet actually formalizes.
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 gives an investor the right to convert their investment into company shares in the future, once the valuation is known.
Term sheets are also sometimes used for SAFE or convertible note rounds, but less often than for priced rounds because SAFE and convertible note legal documents are relatively simple.
What's included in a term sheet?
Along with setting the valuation for the company, a term sheet details the amount of the investment and the terms around how pricing is calculated for the preferred shares the investor will receive for their money. A term sheet also establishes the investor's rights. While all elements of a term sheet are important, some are more standardized while others are more commonly negotiated. A lawyer can help with term sheet negotiation.
Below are some examples of what you'll find in each part of a term sheet.
In this video, Mike takes us into the second section of a Series A term sheet: the charter.
Pricing terms
Pricing terms establish how much your company is worth and how much of it the investor will own. The offering terms may detail the following information:
Pre-money valuation: What investors say your company is worth before their money goes in. This figure determines your price per share.
Post-money valuation: The value of your company after the investment. It is used to calculate the investor's ownership percentage.
Investment amount: The total capital committed by the lead investor and any others investing alongside them.
Option pool: A reserve of shares set aside for future employee equity grants. Whether it is sized before or after the investment affects how much your ownership is diluted.
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. Investors often push for a large pool, but Carta data suggests founders can start the pool at 8% to 10% of equity and expand it in later rounds rather than absorbing all of that dilution up front.
Economic rights
Investors almost always receive preferred stock, which carries economic rights that govern how proceeds are divided in an exit.These include:
Liquidation preference: The right to receive their money back first in an acquisition, IPO, or wind-down.
Pro rata rights: The right to invest in a future round of financing to maintain their ownership level.
Anti-dilution protection: A price adjustment that protects investors against a future down round.
Control rights
In this video, Mike takes us into the five major agreements you'll typically find in a Series A term sheet, starting with the first two: The stock purchase agreement and investor rights agreement.
Venture capitalists typically require control rights that give them a say in major company decisions. These include:
Board of directors composition: The lead investor will usually take a board seat. A common early-stage setup gives the lead investor one seat, the startup founders two, and one seat to a mutually agreed independent member.
Protective provisions: What decisions will need investors' permission to make? This can include selling the company, issuing new stock, or taking on significant debt.
Waiver and amendment provisions (for the financing documents): Could affect investors' ability to block a future financing round.
Right of first refusal (ROFR) and co-sale rights: The right to buy shares before they can be sold to a third party, or to participate in any sale alongside the selling stockholder.
Drag-along rights: Prevents a large stockholder from blocking a sale when the board and remaining shareholders are aligned on the deal.
In this video, Mike takes us through the right of first refusal and co-sale agreement and the voting agreement.
How to negotiate a term sheet
Not every term is up for debate. Most economic terms are negotiable, while procedural terms like the no-shop clause and confidentiality typically are not.
Terms that are usually standard include a 1x non-participating liquidation preference, pro rata rights, and customary protective provisions. Terms that founders more commonly negotiate include:
Valuation and the resulting price per share.
Option pool size and whether it's carved out pre- or post-money.
Liquidation preference structure (participating vs. non-participating).
Board composition and who controls any independent seat.
The scope of protective provisions and the length of the no-shop period.
Leverage matters more than clever arguments. A competitive process, where more than one investor puts a term sheet in front of you, improves your negotiating position more than anything else. Multiple offers give you real choices and real bargaining power.
Today's market is relatively founder-favorable on several of these terms. Carta data shows the down-round rate fell to 11.4% in Q1 2026, down from a peak of about 22% in 2023, and the same report notes liquidation preferences and participation rights are near multi-year lows. In practice, that means aggressive anti-dilution and participating-preferred terms are rarer than they were a few years ago, giving founders more room to hold the line.
Whatever the market, have a lawyer review the term sheet before you sign. Experienced startup counsel can flag non-standard terms quickly and benchmark an offer against current practice, depending on your situation.
What happens after you sign a term sheet?
Signing a term sheet starts due diligence, not a funding close. Your round is not done until the definitive agreements are signed and the money is wired. Treat the signature as the start of the real work, not the finish line.
Due diligence
Due diligence is the review where investors audit your company's legal, financial, and operational health. They confirm everything you told them. For a Series A, this stage typically runs four to six weeks, though it moves faster when your records are clean and organized.
Definitive agreements
Definitive agreements are the binding contracts that replace the term sheet. A priced round usually involves five, based on the NVCA model legal documents that serve as the industry standard:
Amended and restated certificate of incorporation: The charter that legally creates the preferred stock class and is filed with the state of incorporation.
Stock purchase agreement: Sets the terms under which the investor buys shares.
Investor rights agreement: Covers information rights, pro-rata rights, and registration rights.
Voting agreement: Governs board seats and how shareholders vote on major matters.
Right of first refusal and co-sale agreement: Gives the company and investors first claim on shares before they can be sold to outsiders, and grants investors co-sale rights to sell alongside a founder in any secondary transaction.
Closing
Closing is when the deal is done. When all documents are signed and the wire arrives, your cap table is updated to reflect the new investment. To keep that record live and accurate from your first term sheet onward, explore Carta's cap table software.
Term sheet vs. other fundraising documents
Founders often confuse a term sheet with the documents that surround it. The distinction comes down to two questions: is the document binding, and does it set a valuation? The table below compares the four you're most likely to see.
Document | Binding? | When used | What it sets |
Term sheet | Mostly nonbinding | Priced rounds, typically Series A and later | Valuation, investment amount, and economic and control rights |
SAFE | Binding | Pre-seed and seed | Investment amount and conversion terms; defers valuation to a future round |
Convertible note | Binding | Pre-seed and seed | Loan amount, interest, discount, and cap; defers valuation |
Stock purchase agreement | Binding | Closing a priced round | Final legal terms that execute the investment |
Many founders won't encounter a term sheet until their first priced round because most early rounds skip it entirely. In the second quarter of 2026, Carta data shows 93% of all pre-seed rounds were structured as SAFEs, a figure that climbs to 95% when measured by capital raised.
Download our term sheet template
For founders, knowing whether you've received a clean term sheet can be confusing (one that doesn't include things that are widely considered investor-favorable terms). That's why Carta worked with Gunderson Dettmer to create a fair sample term sheet.
This term sheet sample has been prepared by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP (Gunderson Dettmer), for informational purposes only. By submitting your email address and downloading the sample, you are consenting to email marketing from Gunderson Dettmer and Carta.
DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. ("Carta"). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2026 Carta. All rights reserved. Reproduction prohibited.
