As a founder who is trying to raise funding, you are going to encounter a term sheet at some point in your fundraising journey. Infact, you have probably heard the word, term sheet thrown about in VC spaces. And you may have wondered to yourself what exactly it is.

So, here is what you should know.

A term sheet is a document that outlines the key points of a proposed agreement between an investor and a startup. Think of it as a letter of intent. It covers investment details such as company valuation, rights/equity, liquidation preferences and more.

It is important to note that term sheets are not legally binding until both parties sign them. However, they serve as a roadmap for negotiations and can be used to decide which party gets what, should the deal move forward.

Your initial term sheet is likely to act as the foundation for future funding rounds. It can either boost provisions that are in your favour or accentuate any errors that may lead to loss of control or a smaller payout in case of an acquisition.

Term sheets usually follow a similar outline, and generally include the company's details, current shareholders, and directors, the company's valuation, the desired funding amount, and investor information rights.

The agreement also specifies the rights of individual founders or investors to continue serving as directors and addresses the issue of whether investors will possess reserved rights concerning significant company decisions, and includes information on the allocation of invested funds, and any limitations on founder activities, as well as a concise overview of share issuance, transfer rights, and the procedures during the company's sale or dissolution.

Here is an example of a simple series A term sheet sourced from ycombinator.com.

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