---
title: "What is a term sheet?"
description: "What a term sheet records, which clauses bind, and which points move into the charter and definitive agreements in a US venture round."
canonical: "https://contracko.com/blog/what-is-a-term-sheet"
---
# What is a term sheet?

Source: https://contracko.com/blog/what-is-a-term-sheet

[Blog](https://contracko.com/blog)

[What is a term sheet?](https://contracko.com/blog/what-is-a-term-sheet)

# What is a term sheet?

Lou Van Reemst Oct 15, 2026

Copy for LLM

A term sheet is a short document that sets out the main terms of a deal before the parties draft the binding contracts. Picture a two-year-old logistics software company and a venture fund. They sign a four-page term sheet: a $4 million Series A investment at a $16 million pre-money valuation, a 1x non-participating liquidation preference, one board seat for the fund, and a 45-day no-shop. Only the no-shop, confidentiality, and expenses paragraphs bind. So the company cannot court other investors for 45 days, but the fund can still walk away. Money moves only at closing, after the stock purchase agreement is signed and an amended charter is filed.

This guide covers term sheets in United States venture financings and other commercial deals, with Delaware and New York court examples. It is general information, not legal advice. The governing law named in your own term sheet decides the details.

You will meet the same idea under other names. A letter of intent (LOI) usually covers similar ground in letter form. A memorandum of understanding (MOU) is a close cousin. In British practice, "heads of terms" names a similar document. In lending, the same idea appears as a loan or debt term sheet. The label never settles whether the document binds. The wording and the parties' conduct do.

## Term sheet: purpose and uses

A term sheet lets the parties agree on the economics and control of a deal before they pay lawyers to draft long agreements. It turns a negotiation into a one-page or few-page outline. It then becomes the brief that both legal teams draft from.

Term sheets appear in a few common settings:

- Venture capital and growth equity. A company and its lead investor agree on price, preferred stock rights, and governance for a funding round.
- Loans and venture debt. A lender and borrower agree on amount, interest, fees, [payment terms](https://contracko.com/glossary/payment-terms), security, and the loan's [term](https://contracko.com/glossary/term) before the credit agreement is drafted.
- Mergers and acquisitions. A buyer outlines price, structure, and conditions before due diligence starts.
- Licenses and partnerships. Two companies agree on fees, royalties, and scope before a license or [partnership agreement](https://contracko.com/blog/what-is-a-partnership-agreement) is drafted.
- Commercial leases. Landlord and tenant agree on rent, term, and fit-out before the [lease agreement](https://contracko.com/blog/what-is-a-lease-agreement) is drafted.

### Term sheet vs. definitive agreements

The term sheet is a summary. The definitive agreements are the binding contracts that carry out that summary. In a US venture round, the National Venture Capital Association (NVCA) publishes model versions of those documents. Its set includes a certificate of incorporation, a stock purchase agreement, an investors' rights agreement, a voting agreement, and a right of first refusal and co-sale agreement [1].

Each point in the term sheet lands in one of those documents. The table below shows where the main venture terms usually end up in the NVCA model set [1].

| Term sheet point | Usually lands in |
| --- | --- |
| Price, amount, closing conditions | Stock purchase agreement |
| Dividends, liquidation preference, conversion, anti-dilution | Certificate of incorporation |
| Protective provisions (investor veto rights) | Certificate of incorporation |
| Information rights, registration rights, right to buy into future rounds | Investors' rights agreement |
| Board composition, drag-along | Voting agreement |
| Transfer limits on key holders' shares, often founders | Right of first refusal and co-sale agreement |

The charter matters most. Under Delaware law, the voting powers, preferences, and special rights of a class or series of stock must be stated in the certificate of incorporation, or in a board resolution the charter expressly authorizes [2]. So a preference agreed in a term sheet does nothing for an investor until it is written into the charter. The NVCA model charter even switches drafting options on "if the term sheet calls for non-participating Preferred Stock" [1].

## Term sheet: parties

Every term sheet names at least two parties. In a venture round, those are the company issuing shares and the lead investor. Other investors usually join the round on the lead's terms. In a loan, they are the borrower and the lender, with any guarantor named too. In an acquisition, they are the buyer and the seller or the target's owners.

Each party has a job between signing and closing:

- The company or borrower gives access to records, keeps the business running normally, and honors any no-shop.
- The lead investor or lender finishes due diligence, confirms internal approvals, and reviews the draft definitive agreements.
- Founders and existing shareholders may need to consent, sign the voting agreement, or accept new transfer restrictions. Founders may also sign new employment terms, which our guide to [employment contracts](https://contracko.com/blog/what-is-an-employment-contract) explains.
- Lawyers on both sides turn the summary into binding documents. They are advisers, not parties.

Check who signs and in what capacity. A company acts through people authorised to bind it. Board and shareholder approval of the financing and the charter amendment usually comes at closing, not at the term sheet.

## Term sheet: key clauses

Most term sheets split their [clauses](https://contracko.com/glossary/clause) into two groups. The first group describes the proposed deal and usually does not bind. The second group creates duties that apply at signing. A clear term sheet says, paragraph by paragraph, which group each clause sits in.

Economic terms (usually non-binding)

- Amount and price. The total investment, the pre-money valuation, and the price per share.
- Option pool. How many shares are reserved for employees, and whether that pool counts before or after the new money. A pool counted in the pre-money valuation dilutes existing holders, not the new investor.
- Liquidation preference. What preferred holders receive first on a sale or wind-down. A 1x non-participating preference returns the investment or the investor's share of proceeds, whichever is greater. A participating preference returns the investment and then a share of what is left.
- Dividends. Whether preferred stock earns dividends, and whether they accumulate.
- Anti-dilution. How the preferred conversion price adjusts if the company later sells shares at a lower price. Broad-based weighted average and full ratchet are the main methods.

Control terms (usually non-binding)

- Board composition. How many seats each group elects.
- Protective provisions. Actions the company cannot take without a set majority of preferred holders. The NVCA model charter offers optional wording that makes acts taken without that consent void [1].
- Drag-along. When other holders must vote for and support a sale of the company approved by named holder groups [1].

Investor rights (usually non-binding)

- Information rights. Which financial statements the company sends, and when.
- Pro rata or first-offer rights. The right of major investors to buy into future rounds. The NVCA model gives this right to "Major Investors" on new securities, with listed exceptions [1].
- Registration rights. Rights to have shares registered for public sale later.

Usually binding clauses

- No-shop or exclusivity. The company agrees not to solicit or negotiate other offers for a set period.
- Confidentiality. The parties keep the terms private.
- Expenses. Who pays each side's legal fees, and whether any amount is capped.
- Governing law. Which state's law applies to the binding paragraphs.

Contracko's free [term sheet review tool](https://contracko.com/tools/term-sheet-review) reads an uploaded venture term sheet. It flags valuation, liquidation preference, option pool, board composition, protective provisions, anti-dilution, exclusivity, and which terms bind [6].

### When a term sheet binds

A "non-binding" label is strong evidence, but it is not the end of the analysis. Courts look at the whole document and at what the parties did next.

Federal courts applying New York law recognize two kinds of binding preliminary agreement [3]. The first settles every point that needs negotiating and binds fully. The second settles major terms but leaves others open. It commits the parties to negotiate the open issues in good faith, not to close the deal [3].

Delaware shows how far this can go. In a 2013 dispute, two biodefense companies had a two-page license term sheet with "Non Binding Terms" in the footer of each page [3]. They later signed a bridge loan agreement and a merger agreement. Each said that if the merger fell through, the parties would negotiate a license in good faith in accordance with that term sheet. One company later terminated the merger agreement. The Delaware Supreme Court held that the duty to negotiate in good faith was enforceable under Delaware law. It also held that expectation damages may be awarded when the trial judge finds the parties would have reached agreement but for the defendant's bad faith [3]. After remand, the Court of Chancery awarded $113 million in expectation damages, and the Delaware Supreme Court affirmed in 2015 [4].

The 2013 opinion also cites an earlier Delaware case on a debt deal. There, a term sheet and letter agreement created an enforceable duty to negotiate a credit facility in good faith [3]. New York differs on remedy. According to the same opinion, New York's highest court limits a plaintiff to reliance damages for breach of an agreement to negotiate [3].

## Dates and lifecycle events

A term sheet lives for weeks, not years, but its dates shape the whole deal. These are the dates to capture from a signed term sheet in a US venture round:

| Date | What it controls |
| --- | --- |
| Offer expiry | When an unsigned term sheet lapses if the company does not sign |
| Signing date | When the no-shop and confidentiality paragraphs start |
| No-shop expiry | When the company may talk to other investors again |
| Target closing date | When the definitive agreements should be signed and funded |
| First sale of securities | Starts the 15-day Form D clock under the federal rule below |
| Information deliveries | Recurring deadlines for financial statements after closing |

The [contract lifecycle](https://contracko.com/glossary/contract-lifecycle) of a term sheet usually runs in five steps:

1. Negotiate and sign. The binding paragraphs take effect, and the no-shop clock starts.
2. Due diligence. The investor reviews the company while counsel drafts the definitive agreements.
3. Closing. The board and shareholders approve, the amended charter is filed, the agreements are signed, and the money arrives. If the deal stalls, the term sheet lapses or the no-shop simply expires.
4. Regulatory filing. An issuer relying on Rule 504 or Rule 506 of Regulation D must file a Form D notice with the Securities and Exchange Commission (SEC). The deadline is no later than 15 calendar days after the first sale of securities in the offering. If that day falls on a weekend or holiday, the deadline moves to the next business day [5].
5. Post-closing rights. The term sheet is now superseded, but the rights it summarised live on in the definitive agreements.

Post-closing dates can run for years. For example, the NVCA model investors' rights agreement requires annual financial statements within 180 days after each fiscal year ends. It requires quarterly statements within 45 days after each quarter, both delivered to major investors [1]. Your own agreement may set different periods.

Watch the no-shop most closely. It often ends before the deal is ready to close. Any extension should be in writing and stored with the original. Contracko's guide to [contract dates](https://contracko.com/docs/contract-dates) shows how end dates and notice periods are tracked in the product.

## Risks and common mistakes

The biggest risk is a gap between what the parties think they signed and what a court later finds. The Delaware case above turned a term sheet marked "Non Binding Terms" into a $113 million judgment, because later signed agreements tied a good faith duty to it [3] [4].

Common mistakes follow from that:

- No clear binding and non-binding split. State which paragraphs bind and that no party must complete the deal until definitive agreements are signed.
- Referring back to the term sheet without thinking. A later contract that says "negotiate in accordance with the term sheet" can give its economic terms weight under Delaware law [3].
- Judging the deal on valuation alone. Preference terms decide who gets paid on a sale. In a simplified example with no other preferred stock, take a $4 million investment for 20 percent and a $10 million sale. A 1x non-participating preference pays the investor $4 million, because that beats 20 percent of $10 million. A 1x participating preference pays $4 million plus 20 percent of the remaining $6 million, so $5.2 million.
- Ignoring the option pool mechanics. A larger pool counted in the pre-money valuation lowers the effective price for existing holders.
- Letting the no-shop lapse or roll silently. Nobody diarises the expiry, and both sides lose track of who may talk to whom.
- Not checking the definitive agreements against the sheet. Points can drift during drafting. Compare the final charter and agreements line by line with the signed term sheet.
- Forgetting post-closing duties. Information rights, consent rights, and first-offer rights bind the company long after the deal closes.

Ask counsel in the governing state to review a significant term sheet before signing.

## Contract-management checklist

File the signed term sheet like a signed contract. It has binding paragraphs, deadlines, and successor documents. Use this checklist when you store it.

Capture these fields

- Parties, signatories, and the governing law named in the sheet
- The binding paragraphs, quoted by number
- The non-binding statement, quoted in full
- No-shop scope and length
- Confidentiality scope and any survival period
- Expense terms, including any cap
- Valuation, amount, liquidation preference, and anti-dilution method
- Board seats, protective provisions, and investor rights

Diarise these dates

- Offer expiry, if the sheet is not yet signed
- No-shop expiry, with a reminder before any extension decision
- Target closing date
- Form D deadline, 15 calendar days after the first sale, if Regulation D applies
- Recurring information-rights deadlines after closing

Review on a cadence

- Weekly before closing: open diligence items and the status of each definitive agreement
- At each extension: confirm it is signed and update every affected date
- At closing: link the charter and agreements to the term sheet, and close its reminders
- Each quarter after closing: confirm information deliveries and any investor consents were handled

Contracko can store the term sheet and its definitive agreements in one central repository. Amendments and attachments are linked to their main contract, and AI reads them in that contract's context [7]. Reminders track deadlines such as end dates and can be assigned to colleagues [7]. You can test this on your own documents with a [free trial](https://contracko.com/pricing).

## Sources

[1] National Venture Capital Association. Model venture financing documents (certificate of incorporation, investors' rights agreement, voting agreement). nvca.org/model-legal-documents

[2] State of Delaware, Delaware Code title 8, section 151(a) (stock rights stated in the certificate of incorporation). delcode.delaware.gov/title8/c001/sc05

[3] Delaware Supreme Court, SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013) (term sheet, good faith negotiation duty, damages). static.case.law/a3d/67/cases/0330-01.json

[4] Delaware Supreme Court, SIGA Technologies, Inc. v. PharmAthene, Inc., 132 A.3d 1108 (Del. 2015) (expectation damages affirmed). static.case.law/a3d/132/cases/1108-01.json

[5] Securities and Exchange Commission, 17 CFR 230.503 (Form D filing deadline). ecfr.gov/current/title-17/chapter-II/part-230/section-230.503

[6] Contracko. Term sheet review tool (what the tool checks). contracko.com/tools/term-sheet-review

[7] Contracko. Contract AI and expiration reminder feature pages (linked amendments, reminders). contracko.com/features

Images in this article were generated with the assistance of AI.

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