United States: What's in a VC Term Sheet?

You've just received your first venture capital term sheet. Congratulations—you've earned it. Now what does it all mean? "Pre-money valuation," "liquidation preference," "pro-rata participation rights"? A seasoned venture capitalist (in this post, a VC or investor) has seen and invoked these concepts hundreds, if not thousands, of times. You? Maybe not so much. But this post can help: it aims to prepare you for a few of the most important terms you'll encounter in almost every term sheet. 


The first step in understanding any term sheet is understanding its purpose. And, although term sheets can take many forms—from summarizing the principal terms of a proposed merger to setting out a joint venture's product development timeline—good term sheets are meant to accomplish a few simple objectives, namely to:

  • Focus Negotiations, Provide High Level Agreement/Understanding and Increase Deal Certainty. A term sheet focuses the parties by putting the framework for a transaction and its most essential terms on paper. This allows the parties to identify key issues on which there is (and isn't yet) agreement and determine if a deal is more likely than not to happen. If the parties think a deal will happen, they'll be more amenable to taking the next step and committing additional time and effort to the transaction.

When reviewing and negotiating a term sheet, it's important to keep these objectives in mind. For instance, a term sheet should not set out every detail regarding the company's relationship with its investors. There will be definitive agreements for that. At the term sheet stage, you and your investors should be able to understand the key terms and conditions of the investment. If you are all on the same page, then go forward together. If not, move on.

Down to Brass Terms

So what should be included in the term sheet and not deferred to the definitive documentation?

For one, the company's valuation, which sets a baseline for future financings and, together with the amount of the VCs' investment, determines how much of the company you and your co-founders will continue to own. When evaluating offers, it's important to remember that a higher valuation doesn't always equate with a better offer. Though a full explanation as to why is beyond the scope of this post, an inflated valuation can, for instance, lead to a later down round if results fail to meet expectations. Many unicorns, as Bill Gurley cautions, have faced, and others may soon face, this reality. Moreover, in some cases, valuations that appear higher on paper may contain terms—like a larger liquidation preference or pre-money option pool—with dilutive effects that may not be so readily apparent.

Valuation will probably be the point most important to you and to the investors, but what else will the investors care about?

Investors generally focus on three additional things in a financing (and therefore in the financing term sheet): 1) an ability (beyond their current stock ownership) to share in the company's upside potential, 2) protection against downside risks, and 3) information about and influence over the company's present and future. We highlight some examples of each below.

  • Upside Potential. If things are going well and your company contemplates raising more money to grow its business, a VC who has already invested time and money into the company will likely want the ability to share in this growth. This is where "pro-rata" participation rights in a term sheet come in. These rights allow the investor to purchase the same portion of a future financing round as the investor currently owns of the company and thus maintain his or her ownership percentage.
  • Downside Protection. What if things don't go well and the company contemplates selling itself at a valuation below that of its latest financing? In this case, a VC wants the right to say something to the effect of "at sale, give me the greater of my initial investment or my ownership of the company." The term sheet provision granting this right is an investor's "liquidation preference"—in this example, a 1x non-participating preference. We have covered various types of liquidation preference and why they matter in a previous post.
  • Information and Influence. Finally, an investor wants information—on the company's operations, results and outlook—as well as some ability to influence each of these. In other words, an investor will generally want the right to have a representative on the company's board of directors. The representative will have voting rights on, and in some cases veto rights over, major decisions such as whether to sell the company. Although you may initially recoil at this loss of control, experienced investors bring a number of skills that the company and the company's board of directors may lack. In a another previous blog post, WilmerHale Partner Josh Fox describes building a capable board of directors.

Binding Obligations

At this point, you may be asking yourself whether any of the terms in the term sheet create binding legal obligations on your company. After all, most term sheets are labeled "nonbinding" on the first page and sometimes on every page. The answer, despite these references to the term sheet being "nonbinding," is that certain specific terms will create legally binding obligations.

A VC will want a few legally binding commitments on your company so that the VC can devote the time and effort necessary to evaluate the potential transaction, whether or not money ever changes hands. To protect these resources, VCs will ask for a period of exclusivity during which you and the company agree not to shop for other potential offers. This period should generally coincide with the deal timeline—usually around 30 days. In addition, VCs will ask you to keep the term sheet and its specific terms confidential, in part to protect what VCs see as their competitive advantage—an ability to evaluate companies and propose winning terms.

Here it's also important to recall that a term sheet provides focus. Some terms, like the exclusivity and confidentiality obligations described above, will likely be must-haves for your investors and therefore legally binding. But, the other terms, while not legally binding, do set the framework for the transaction. In the negotiations over the definitive documents, you and the investors will point to these terms as if they carried binding authority. So, you should be careful about each and every term in the term sheet, both those that are legally binding and those that are not.

And, before leaving this topic, it's important to raise one word of caution regarding a term found in many terms sheets: an obligation to negotiate definitive documents in good faith. The Delaware courts have found this obligation to be legally binding even when the relevant parties did not sign a term sheet they had negotiated (but instead attached the term sheet to an agreement they did sign). This is one reason we advise deliberation and care in the term sheet process. We expect to cover the relevant decision and some of its implications in a later post.


What's in a VC term sheet? Your and the investors' clear and concise understanding of the terms of the investment. That's it. Contact us with questions. We're here to help.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Nutter McClennen & Fish LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Nutter McClennen & Fish LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions