What is Term Sheet?

A term sheet is a non-binding document that outlines the key terms of an investment. It's the starting point for negotiation before binding legal documents are drafted.Key term sheet elements:Valuation: Pre-money and post-money valuationInvestment amount: How much is being raisedEquity: Percentage ownership investors receiveLiquidation preference: Who gets paid first in exitBoard seats: Investor representationAnti-dilution: Protection against down roundsVesting: Founder equity vesting scheduleRed flags: Excessive liquidation preferences, full ratchet anti-dilution, excessive board control, participating preferred stock.Key clauses investors should understand: Liquidation preference determines who gets paid first in an exit and at what multiple. Anti-dilution provisions protect investors if the company raises at a lower valuation later, with weighted-average being more founder-friendly than full ratchet. Board seat allocation gives investors direct influence over company decisions, including hiring, spending, and strategic direction. Pro-rata rights allow existing investors to maintain their ownership percentage in future rounds.Term sheets in crypto and what founders should negotiate: Token-based projects increasingly use term sheets for SAFT (Simple Agreement for Future Tokens) deals, covering token allocation, vesting schedules, and lock-up periods. Founders should negotiate for single-trigger acceleration on vesting, reasonable liquidation preferences of no more than 1x non-participating, and protective provisions that require super-majority votes. Having experienced legal counsel review every term sheet is critical, as seemingly minor clauses around drag-along rights or information rights can have outsized impact during exits or future fundraising.