Last updated: 2 November 2026
A venture capital term sheet is a summary of the main terms on which an investor proposes to invest, agreed before long-form legal documents are drafted. Most of it is non-binding, but confidentiality and exclusivity are binding.
What is a term sheet?
A term sheet is a summary of the main terms on which an investor proposes to invest, agreed before the long-form legal documents are drafted. It is not the final agreement. It sets out the proposed deal in plain terms so both sides can negotiate before lawyers draft the full documents.
Michelmores groups UK venture capital term sheets under eight headings: the investment, conditions precedent, economic terms, governance terms, share dealings, exit terms, vesting of founder shares, and confidentiality and exclusivity. These headings show that a term sheet covers far more than price. It also sets out conditions, control, founder vesting, exit rights and confidentiality.
This matters because a term sheet shapes the deal before the detailed legal work begins. Founders should treat it as the framework for the whole round, not as a formality. Once the headline terms are agreed, they are hard to revisit later without losing trust or momentum.
Is a term sheet legally binding?
A term sheet is generally non-binding. The two exceptions are confidentiality and exclusivity, which are legally binding irrespective of whether the investment completes. This means the commercial terms may fall away, but the parties remain bound on those two points.
Venture capital firms typically expect companies to agree to an exclusive negotiation period, because they spend significant time and money evaluating the deal. We found no standard exclusivity length. Founders should read the exclusivity length, any cost-sharing clause and what happens if the deal falls through.
In practice, this means a founder should not assume the whole document is only a discussion paper. Confidentiality and exclusivity can create real obligations, including limits on talking to other investors. If the deal fails, the question of who pays costs can also matter.
Which economic terms matter?
Economic terms include enterprise valuation, price per share and the type of security. The security may be preferred shares, an advance subscription agreement or convertible loan notes. For preference shares, founders should check the liquidation preference and any dividend rights. On liquidation preference, the relevant comparison is 1x non-participating versus participating.
Option pool size also matters, along with whether it sits in the pre-money. A larger pool carved from the pre-money reduces the value existing holders receive. The table below shows the worked example.
| Scenario | Existing holders | Effective pre-money |
|---|---|---|
| £1.0m at £4.0m pre-money, £5.0m post-money; investor owns 20% | 80% | £4.0m |
| Investor also demands a 10% post-money pool carved from the pre-money | 70% | £3.5m |
The worked example shows the effect step by step. £1.0m invested at a £4.0m pre-money valuation gives a £5.0m post-money valuation, so the investor owns 20%. Existing holders therefore retain 80%. If the investor also demands a 10% post-money pool carved from the pre-money, existing holders end at 70%, which is an effective pre-money valuation of £3.5m. What this means is that a pool taken from the pre-money lowers the value received by existing holders.
Which control terms matter?
Control terms include board composition, investor information rights and items requiring investor consent, known as reserved matters. Founders should understand who sits on the board, what reports must be provided and which decisions cannot be made without investor approval.
Other control-related points include anti-dilution protection and the conditions precedent that must be satisfied before completion. Founder vesting is also commonly set out in the term sheet, and founders should review the vesting guide separately. Anti-dilution terms can change ownership after later rounds, so they deserve careful review.
These terms decide who runs the company after the round closes. A founder may keep majority ownership but still need investor consent for major decisions. That is why reserved matters should be read line by line.
What happens after signing?
After signing, the process moves to due diligence, then long-form documents. In the United States, the NVCA publishes model documents: a certificate of incorporation, stock purchase agreement, investors’ rights agreement, voting agreement, and right of first refusal and co-sale agreement. The NVCA says each is a starting point only. Its documents were revised through June 2026.
The term sheet therefore starts the legal process rather than ending it. It gives lawyers the agreed framework, but the long-form documents contain the detailed rights, obligations and protections.
Founders should expect questions during due diligence and should not treat signing as the finish line. The long-form documents must match the term sheet, so any mismatch should be raised before completion.
Checklist before you sign (ours)
Before signing, founders should check whether the valuation is pre-money or post-money, and what pool it includes. They should confirm what preference applies and whether it is participating. They should check what is binding and for how long, who pays costs if the deal fails, which decisions need investor consent, and have a lawyer read the term sheet.
This checklist is a practical way to slow down and compare the document with the deal as understood. It also reminds founders that legal review is not optional. A lawyer can spot missing detail, unclear cost terms or control rights that are broader than expected.
Frequently asked questions
Is a term sheet the same as an investment agreement?
No. A term sheet is a summary of proposed terms agreed before long-form documents are drafted. The investment agreement and related documents contain the detailed legal obligations.
Which parts of a term sheet are legally binding?
Confidentiality and exclusivity are legally binding irrespective of whether the investment completes. The rest is generally non-binding, although it still shapes the deal.
Why does option pool placement matter?
If a pool is carved from the pre-money, existing holders receive less value from the round. The worked example shows existing holders falling from 80% to 70% when a 10% post-money pool is added.
What is a liquidation preference?
It is a preference right attached to preference shares, such as a 1x non-participating or participating preference. Founders should check what applies before signing.
Should founders sign without legal advice?
No. Founders should have a lawyer read the term sheet, especially on binding terms, costs, exclusivity, control rights and preference terms.
Sources
- Michelmores: the VC series, term sheets
- NVCA: model legal documents
- HSBC Innovation Banking: employee option pools
Figures and prices were checked on 2 November 2026; check the linked sources before relying on them. This article is general information, not tax, legal or investment advice.
