The Holy Grail of Entrepreneurship: The Term Sheet, Part 1

Term Sheet

“A term sheet is like a prenuptial agreement and a coach’s playbook. Spend the time to understand the plays, and what happens should you ever separate from the business.”- Mitch Thrower

The term sheet can be defined as the summary document of key terms in contemplation of a financing, according to Brad Feld and Jason Mendelson, venture capitalists and co-authors of the book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.

In this series we are going to explore the contents and key terms of the term sheet, demystifying one of the most critical pieces to entrepreneurship and startup investing.

To tackle a good understanding of a term sheet we are going to break it into parts by asking important questions, and use examples to explain the answers as simply as possible. Let’s start with a few basic questions.

What Does a Term Sheet Look Like?

To give you a visual of what a term sheet looks like, here are three front pages from actual term sheets:

Term Sheet Example 1 Term Sheet Example 2Term Sheet Example 3
Exciting, right? They are simple, black-and-white text documents with lots of bullet points containing large words juxtaposed to numbers and percentages. The average term sheet can range from 1,000 words (3-4 pages) to over 5,000 words (15-16 pages). As you can see, the word count demonstrates the range of length between term sheets, which illustrates the point that the term sheet is a highly customized document. There is no cookie-cutter, one-size-fits-all template.

The National Venture Capital Association (NVCA) provides model legal documents for the venture community, including a term sheet. The NVCA comments on the documentation procedure of the industry, writing that “the venture industry goes through an expensive and inefficient process of ‘re-inventing the flat tire’ on a daily basis.” In other words, the industry spends $200 million in direct legal fees to develop these documents from scratch for each deal every year. The point: there is no standardized “correct” term sheet; each term sheet is unique.

The complexity of the term sheet will depend on the conditions and complexity of the offering, such as the number of investors, the presence of debt, the stage of the company, etc. Nevertheless, while deals may vary significantly, proper term sheets will contain repeated, consistent terms regardless of the deal size.
In this series, we are going to walk through a sample term sheet and explain each key term in an understandable, digestible way.

Is the Term Sheet a Legally Binding Document?

Before we dive into an example, one of the first things to know is the term sheet is not a legally binding contract. Joshua W. Bartlett, Special Counsel, McCarter & English, LLP, explained that, with the right language in place, the term sheet is not a binding contract. He recommended using the below statement to protect both the entrepreneur and the investor parties from liability:

The parties expressly agree that no binding obligations will be created until a document entitled “final agreement of purchase and sale” is executed with the requisite formality and delivered by both parties.

Think of term sheets as similar to “letters of intent” (LOI). They are preliminary documents meant to record two or more parties’ intentions to enter into a future agreement based on specified terms.

Offering Terms

After the title, contact information, and preliminary legal stipulations such as the one mentioned above, we come to the “offering terms” section of the term sheet. Think of the offering terms (a.k.a. Structure of Financing) as the money – a snapshot of how much capital is being invested in the venture.


The offering terms section contains six statements:

  1. Closing Date
  2. Investors
  3. Amount Raised
  4. Price Per Share
  5. Pre-Money Valuation
  6. Capitalization

Next Step – The Holy Grail of Entrepreneurship: The Term Sheet, Part 2 – offering terms

NOTE: This article may discuss issues for which legal advice should be considered prior to a decision or agreement with a third party.  It should be noted that the author is not an attorney, and FundingSage is not a law firm.  FundingSage’s employees and affiliates do not provide legal advice.  We recommend you seek the services of an attorney if legal advice is required.

  • It is dangerous to state unequivocably that Term Sheets are not legally binding. While that may be true for the most part, whether a specific Term Sheet is or is not legally binding will depend on what is written into the document and what jurisdiction you are in. Considering that we are on the internet and will have readers from all over the world, if you are in California like the author of this blog, there will be an analysis of traditional California contract law to determine if a specific Term Sheet is enforceable or not. There have been cases where some parts of a term sheet have been enforced partially because of a quasi-contract rule called Promissory Estoppel – meaning while the document wasn’t legally enforceable as a contract, there were provisions of the document that was enforced against one party because the other party relied on those provisions, to their harm. Of course, each state, each province, and each country will apply their own laws, and roughly half of the world doesn’t even follow ‘common law’ – therefore if you give a term sheet to someone from/in Germany, Japan, or even Louisiana or Quebec, you will be dealing with a very different approach to contracts. I would hate to see someone flout term sheet provisions without taking them seriously, thinking they are not enforceable at all, and then learn to their dismay that some or all of their document is held enforceable against them.

  • Chang, thanks for your reply and comments! Your observations are correct and like you, we at FundingSage agree that provisions of agreements should be taken seriously and the specifics of local law should be considered.

    Readers should note that the author is not an attorney and FundingSage is not a law firm. Neither FundingSage or its’ employees provide legal advice. The article above is provided to share information and alternatives with entrepreneurs such that they are able to negotiate the funding journey with less effort and with a higher probability of success. We recommend legal advice be sought from an attorney prior to the execution of any agreement or issue with legal considerations.

    We thank Chang for noting this to our readers and for alerting our company of potential misunderstandings which may occur, such that this may be considered as our team develops future posts.

Dave Schools

Dave Schools is a writer. When he’s not working as director of marketing at Mitch Cox Companies, he writes about startups, tech, and design for Business Insider, The Next Web, Quartz, and Smashing Magazine. He earned a degree in Entrepreneurship from Grove City College, founded Efographic, and is working on two mobile apps: Brew and City Swipe. Say hi to him on Twitter.