Last updated: 2025-10-08
A term sheet is a short, non-binding document that outlines the key terms of an investment deal. Think of it as a blueprint: it sets expectations before lawyers draft the final legal documents.
When an investor wants to invest in your startup, they don't just hand you money. They need to agree on terms like:
The term sheet captures all of this in plain language (before lawyers turn it into 50+ pages of legal documents). It's not legally binding, which means you can still negotiate or walk away, but it sets the framework for the deal.
Why it matters for beginners
Understanding term sheets helps you negotiate better deals. Many founders sign terms they don't fully understand, which can hurt them later. Learning the basics now saves you from costly mistakes.
Term sheets get more complex as your company grows. Here's what to expect at each stage:
At this stage, investors want speed and simplicity. You'll typically use a SAFE, which is a simple 2-3 page document.
Still using SAFEs or convertible notes, but terms get more specific.
This is where term sheets get serious. You're doing a priced equity round with full legal protections.
See how term sheets work in practice with concrete examples and calculations. These scenarios help you understand the real impact of different terms.
Scenario: You raised €200K on a SAFE with €5M valuation cap and 20% discount. Now raising Series A at €10M pre-money valuation.
What happens:
Scenario: You raised three SAFE rounds:
Now raising Series A at €12M pre-money for €2M.
What happens:
Scenario: You raised Series A at €10M valuation. Now need to raise Series B at €8M (down round). Series A investors have weighted average anti-dilution protection.
What happens:
Scenario: Your company gets acquired for €15M. Series A investors invested €3M with 1x non-participating liquidation preference. You own 60%, they own 30%, employees own 10%.
✅ With 1x non-participating (standard):
❌ With 1x participating (investor-heavy):
Scenario: Seed round negotiation. Investor's initial offer vs your counter-proposal.
📋 Investor's initial offer:
✅ Your counter-proposal:
Result: You negotiate to €5.5M cap and 22% discount. This is reasonable compromise that protects your ownership while still rewarding early investors.
First-time founders often make these mistakes. Learn from them before you negotiate.
Many founders don't realize how much equity they're giving away. Example: Raising €500K at €2M pre-money gives investors 20% (not accounting for option pool). If you also set aside 15% for employees, your ownership drops to 68%. Always model dilution before signing.
At pre-seed, you shouldn't accept board seats, liquidation preferences, or complex anti-dilution. These are Series A terms. If an investor insists on them early, they're either inexperienced or trying to take advantage. Walk away.
Investors expect negotiation. If you accept the first offer without discussion, you signal inexperience. Always negotiate key terms like valuation cap, discount, and pro-rata rights. It's business, not personal.
Post-money SAFEs make dilution clearer upfront, but can be less founder-friendly if you raise multiple rounds. If you're doing multiple SAFE rounds, understand how they stack up. Pre-money SAFEs are generally better for founders doing multiple raises.
Even SAFEs should be reviewed by a startup lawyer. They'll catch red flags, explain implications, and help you negotiate. The €500-€1,500 cost is worth avoiding costly mistakes later. Don't DIY legal documents.
Some terms are so problematic that you should consider walking away. Here's what to watch for:
This protects investors so aggressively that it can destroy founder ownership if you raise a down round. Weighted average is standard. Full ratchet is investor-heavy and signals they don't trust you.
Investors get their money back AND a share of remaining proceeds. This double-dips and hurts founders. 1x non-participating is standard. Participating preference means investors don't believe in your upside.
At seed, founders should control the board (2 founders, 1 investor is standard). If investors want majority control early, they don't trust you to run the company. This is a control red flag.
Standard founder vesting is 4 years with 1-year cliff. If investors want longer vesting or multiple cliffs, they're trying to lock you in. This signals lack of trust and can hurt your ability to leave if things go wrong.
If investors want to modify the standard Y Combinator SAFE template significantly, be cautious. Standard templates are battle-tested. Custom terms often favor investors and can create problems in future rounds.
When to walk away
If you see multiple red flags or an investor refuses to negotiate on standard terms, walk away. There are other investors. Bad terms can hurt you for years, even if you desperately need the money now.
Negotiation is expected. Here's how to do it effectively as a first-time founder:
At pre-seed/seed, focus on: valuation cap, discount, and pro-rata rights. Don't waste energy on terms that are standard (like conversion triggers in SAFEs).
Example: If they offer €5M cap with 20% discount, counter with €6M cap and 15% discount. This is reasonable negotiation.
Research what's standard for your stage and market. If investors propose non-standard terms, point to market norms. Example: "I've seen 1x non-participating liquidation preference is standard at seed. Can we align with that?"
Don't negotiate one term at a time. Package your asks: "We'd like €6M cap instead of €5M, and in exchange we can offer 15% discount instead of 20%." This shows you understand trade-offs.
If you have multiple investors interested, you have leverage. Don't be afraid to say "I have other offers" if it's true. Investors respect founders who have options.
Before negotiating, decide what terms are deal-breakers. If investors won't budge on red flags, be prepared to walk away. Better to raise later with good terms than now with bad ones.
| Feature | SAFE | Convertible Note | Equity Round |
|---|---|---|---|
| Best for | Pre-seed, seed (most common) | Seed stage | Series A+ |
| Interest rate | None | 2-8% typical | N/A |
| Maturity date | None | Yes (18-24 months) | N/A |
| Valuation | Cap + discount | Cap + discount | Fixed upfront |
| Complexity | Simple (2-3 pages) | Moderate | Complex (10-15 pages) |
| Speed to close | Fast (1-2 weeks) | Moderate (2-4 weeks) | Slow (4-8 weeks) |
| Board seats | No | No | Yes (typically) |
Bottom line: Use SAFEs for speed at pre-seed/seed. Use convertible notes if investors insist (less common now). Use equity rounds when you have real traction and need formal governance.
Signing the term sheet is just the beginning. Here's what comes next:
Investors will verify your claims: check financials, review contracts, talk to customers, verify IP ownership. Be prepared and organized. Delays here slow down closing.
Lawyers draft the final documents based on the term sheet. For SAFEs, this is quick. For equity rounds, expect extensive back-and-forth on legal language. Budget €5K-€15K for legal fees.
Once documents are signed, investors wire the money to your bank account. For SAFEs, this happens quickly. For equity rounds, it may be tied to closing conditions.
Investors become part of your cap table. They'll want updates, may help with intros, and will participate in future rounds. Build the relationship—good investors are long-term partners.
Before you start negotiating term sheets, have these ready. It shows you're serious and helps you negotiate from a position of strength.
Pro tip
Having this information ready speeds up negotiations and shows investors you're organized. It also helps you understand the impact of different term sheet proposals on your ownership.