A non-binding document that outlines the key terms and conditions of a proposed investment or financing agreement between parties, usually between a startup and its investors. The term sheet serves as a blueprint for the final investment contract and helps align the expectations of both parties before proceeding to detailed negotiations.

Key components of a term sheet typically include:

Valuation: The pre-money and post-money valuation of the company, which determines the price per share for the investment.
Investment Amount: The total amount of capital being invested by the investors.
Equity Stake: The percentage of ownership that the investors will receive in exchange for their investment.
Type of Security: The specific type of financial instrument being offered, such as common stock, preferred stock, convertible notes, or other securities.
Dividends: Details regarding any dividend payments to investors, including rates and preferences.
Liquidation Preferences: Terms that dictate how proceeds will be distributed in the event of a liquidation or acquisition, often favoring preferred shareholders.
Voting Rights: Information about the voting rights associated with the shares being issued, including any special rights for preferred shareholders.
Board Composition: Terms regarding the composition of the company’s board of directors, including any seats reserved for investors.
Use of Proceeds: An outline of how the funds raised will be utilized by the company.
Exit Strategy: Potential exit strategies for investors, including IPO, acquisition, or other liquidity events.
Other Provisions: Additional clauses that may address rights of first refusal, co-sale rights, anti-dilution provisions, and other protective measures for investors.

While the term sheet is not legally binding (with the exception of certain clauses, such as confidentiality or exclusivity), it serves as a critical step in the investment process, helping to ensure clarity and mutual understanding before moving forward with definitive agreements.

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