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What is a term sheet

Also known as: investment term sheet

Definition

A term sheet is a short, mostly non-binding document with the key terms of an investment, such as amount, valuation, control and liquidation preference.

Why it matters

A term sheet sets the relationship between founders and investors before anyone signs the long documents, so the negotiation that matters happens here.

Common mistakes

Comparing term sheets by valuation alone, while the liquidation preference and the pool change what the founders actually receive.

Related terms

Worked exampleIllustration

A seed term sheet and two exits

Term sheet, seed round

  • Investment₪1,000,000
  • Pre-money valuation₪4,000,000
  • Price per share₪500
  • Investor's share after the round20%
  • Option pool, created before the money10%
  • Liquidation preference1x, non-participating

Clauses that usually bind

  • Confidentiality
  • Exclusivity for an agreed period
  • Costs and governing law

Steps

  1. A sale at ₪3,000,000: the investor takes the larger of the 1x preference, ₪1,000,000, or 20% of the sale, ₪600,000.₪1,000,000

  2. The founders and the option holders share what is left of the ₪3,000,000.₪2,000,000

  3. With a 2x preference instead, the investor would take ₪2,000,000 of the same sale first.₪1,000,000 left

  4. A sale at ₪12,000,000: 20% of the sale is more than either preference, so the investor converts to ordinary shares.₪2,400,000

  5. In the large sale the preference does not bite, and the rest goes to the other holders.₪9,600,000

Same valuation on the sheet, a ₪1,000,000 difference in a small exit and none in a large one.

Illustration

Same term sheet, two sales

Sale price₪3,000,000

The investor takes₪1,000,000

Left for founders and option holders₪2,000,000

Dashed line: 20% of the sale, ₪600,000

At ₪3,000,000 the preference bites: the investor takes ₪1,000,000 first, more than 20% of the sale (₪600,000), and the founders and option holders share ₪2,000,000.

The investor holds 20% and a non-participating liquidation preference: in a sale they take the preference or their 20%, whichever is more.

Answering a term sheet

The headline valuation is one line. The other clauses decide the deal.

Situation

An investor offers ₪1,000,000 at a ₪4,000,000 pre-money valuation, with a 2x liquidation preference.

Choose an option

Definition

A term sheet sets out the main terms of a proposed investment before the lawyers write the binding agreements: how much money, at what valuation, which class of shares, the liquidation preference, board seats, investor vetoes and the option pool. Most of it does not bind, but a few clauses usually do: confidentiality, exclusivity (the company agrees not to shop the deal for a period), costs and governing law. The NVCA model term sheet is the common reference in the United States.

Why it matters

The headline valuation is only one line. The liquidation preference decides who is paid first in a sale, and board seats and vetoes decide who controls decisions. Negotiations go best when both sides discuss openly how value, control and risk are shared.

Directly related: Equity, Dilution, SAFE.

Improvement tips

  • Read the terms that move money and control, not only the valuation: liquidation preference, board seats, vetoes and the option pool.
  • Model a small exit and a large one with the proposed preference before you agree to it.
  • Have a lawyer who works on investment rounds review the term sheet before you sign it.
  • Negotiate openly and keep the relationship, because the investor will sit with you for years.

Common mistakes

  • Treating the whole term sheet as binding, or as not binding at all. A few clauses usually bind, and in Israel good faith applies to the negotiation itself.
  • Not understanding how investor vetoes can limit later decisions, such as a new round or a sale.

Related terms

StartupsBeginner

Equity

Equity is ownership of a company, measured in shares and percent. On a balance sheet the same word means book equity: what the business owns minus what it owes.

StartupsIntermediate

Dilution

Dilution is the fall in existing shareholders' percentage of a company when it issues new shares. The percentage drops, while the stake's value can rise.

StartupsIntermediate

SAFE

A SAFE (simple agreement for future equity) is a contract where an investor pays now and gets shares in the next priced round, with no valuation set today.

StartupsIntermediate

Pre-money Valuation

Pre-money valuation is the agreed value of a company just before new investment comes in. It sets the price per share and how many shares the investor receives.

StartupsIntermediate

Post-money Valuation

Post-money valuation is a company's value right after a funding round: the pre-money value plus the new investment. It sets each investor's percentage.

From the blog

Early-Stage Fundraising: What Investors Need to See

How founders can prepare for early fundraising with clearer milestones, traction evidence, dilution thinking, and investor-ready answers.

What Is Equity in Business?

Plain-language equity basics for founders, partners, early employees, and investors, including cap tables, dilution, options, and rights.

Quick check

Is a standard term sheet a legally binding contract to invest?

Choose an answer

Frequently asked questions

Do I need to understand term sheets before I raise money?
Learn the main terms before your first investor meeting. Knowing what to expect helps you spot a bad deal.
When does a term sheet appear?
After an investor decides to invest, and before the lawyers draft the final agreements and run due diligence.
Does a signed term sheet guarantee the investment?
No. Most of it does not bind, and a deal can still fall through in due diligence or over the final agreements.
How can a term sheet affect my control?
Through board seats, investor vetoes over decisions such as a new round or a sale, and the liquidation preference. These can limit you even while you hold most of the shares.
What is a liquidation preference?
The investor's right to be paid first in a sale. With a 1x non-participating preference, the investor takes either the amount invested or its percentage of the sale, whichever is larger. The NVCA model term sheet also offers participating versions.
Should I accept a high valuation with harsh terms?
Be careful. A strong liquidation preference or broad vetoes can cost the founders more in a sale than a higher valuation gains them. A lower valuation with cleaner terms is often the better deal.
What goes wrong when a founder signs without a lawyer?
Founders can agree to vetoes that block key decisions, a preference that takes most of a small exit, or exclusivity that stops them talking to other investors. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
How do I negotiate without hurting the relationship?
Explain your reasons, focus on the few terms that matter most, and treat the investor as a future partner rather than an opponent.
What is a term sheet in simple words?
A short summary of the deal: how much the investor puts in, at what value and what they get in return, written before the long contracts.
Is a term sheet legally binding?
Mostly not. Clauses such as confidentiality, exclusivity, costs and governing law usually are. In Israel, section 12 of the Contracts (General Part) Law 1973 also requires anyone negotiating a contract to act in a customary manner and in good faith, so walking away in bad faith is not free. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Do I need a lawyer to negotiate a term sheet?
Yes. A lawyer who works on investment rounds should review it before you sign, because its terms carry into the binding agreements. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Does receiving a term sheet cost money?
Receiving one costs nothing. The legal work to close the round does, and those fees are often paid from the money raised once the round closes.

Sources: NVCA, Model Term Sheet (nvca.org), checked September 2026, Contracts (General Part) Law 5733-1973, section 12 (nevo.co.il)

Last reviewed: 2026-09-24

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