Process & paperwork
Term sheet
Also called Letter of intent, Heads of terms
A short, mostly non-binding summary of a proposed investment's key terms, signed before the full legal documents are drafted.
In plain English
A term sheet is two to six pages that set out valuation, amount, share class, liquidation preference, board composition, protective provisions, anti-dilution, pro-rata rights and the conditions to closing. It exists so that the parties agree the substance before anyone pays a lawyer to draft forty pages of it.
Most of it is expressly non-binding. The exceptions — usually stated explicitly — are exclusivity, confidentiality and who bears costs if the deal does not complete. This means an investor can walk away after signing without legal consequence, and occasionally does.
Its practical force is much greater than its legal force. A signed term sheet is a public commitment among professionals whose reputations depend on honouring them, and the market treats a reneged term sheet as a serious matter. In ordinary conditions the great majority proceed to closing.
It is also the only document in which the terms are genuinely negotiable. Once the long-form documents are drafted from the term sheet, reopening a point is expensive and is resisted on the basis that it was already agreed. Whatever you want to change, change it here.
What it means for your cheque
As an angel you will rarely negotiate the term sheet — the lead does that. What you should do is read it, because it tells you what you are joining. The liquidation preference, the share class you will receive and the pro-rata provisions are all there, and they are the terms that will decide your outcome.
If something in it is wrong for you, this is the moment to say so, through the lead or directly to the founders. After the term sheet is signed, changing a term requires reopening a negotiation that everyone considers finished, and a small cheque does not have the standing to do that.
Do the arithmetic
What to read first in a term sheet
The clauses that decide an angel's outcome, in order of how much they matter and how often they are skipped.
| Share class offered to non-lead investors | Decides everything in a modest exit — read first |
|---|---|
| Liquidation preference: multiple and participation | 1× non-participating is standard; anything else needs explaining |
| Pro-rata rights and any major-investor threshold | Determines whether you can follow on |
| Anti-dilution formula | Broad-based weighted average is standard |
| Option pool size and whether it sits pre-money | Moves several percentage points |
| Board composition | Tells you who will control the company |
| Valuation | The number everyone discusses, and rarely the most important one |
Most first-time angels read the valuation and stop. The six items above it are collectively worth far more to the outcome.
At the table
What to negotiate
- Negotiate here or not at all — everything downstream is drafting rather than deal-making.
- Confirm which provisions are binding. Exclusivity, confidentiality and cost allocation usually are.
- Check the conditions to closing, particularly any diligence condition that lets the investor walk.
- Ask who pays the legal costs and whether there is a cap on the company's contribution to the lead's fees.
- Check the exclusivity period. Thirty to sixty days is normal; longer leaves the company unable to talk to anyone else for too long.
Around the world
How this differs by market
NVCA model term sheets are the reference and are freely available. Deviations from them are visible to anyone who knows the templates.
EUBVCA model documents serve the same purpose in the UK. Continental practice varies more, and German rounds involve notarisation that affects the timetable.
APACSingapore uses broadly US-style documents. The Venture Capital Investment Model Agreements published for the region have improved standardisation.
Term sheet: common questions
Is a term sheet binding?
Can a term sheet be withdrawn?
What should an angel read first?
Keep reading