What is a term sheet?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
A term sheet is a short summary of the main terms of an investment, agreed before the full legal documents are drafted. Most of it is non-binding, but clauses such as confidentiality, exclusivity (a no-shop) and sometimes expenses usually are binding. Read the economic terms, like valuation, option pool and liquidation preference, together with the control terms, like board seats and investor approval rights.
What does a term sheet cover?
A term sheet is usually two to ten pages. For a priced round, it typically covers:
| Area | Terms to look for |
|---|---|
| Economics | Pre-money valuation, amount raised, price per share, option pool size, liquidation preference, dividends, anti-dilution |
| Control | Board composition, investor approval rights (protective provisions), information rights |
| Future rounds | Pro rata rights, rights of first refusal, co-sale |
| Exit | Drag-along, registration or IPO rights |
| Founders | Vesting on founder shares, IP assignments, non-solicits |
| Process | Closing conditions, due diligence, exclusivity, confidentiality, legal fees |
A SAFE round may have no term sheet at all, or a short one-page summary of the cap, discount and amount.
Is a term sheet binding?
Mostly not. The term sheet usually says which parts bind. Commonly binding:
- Confidentiality. You can’t share the terms with other investors.
- Exclusivity, or “no-shop”. For a set period, you can’t solicit or negotiate with other investors.
- Expenses. Who pays the investor’s legal fees, often the company up to a cap.
- Governing law.
The rest, including valuation, is a statement of intent. Either side can still walk away before the definitive documents are signed, though doing so after a signed term sheet has reputational costs.
What’s the difference between pre-money and post-money in a term sheet?
Pre-money valuation is the company’s value before the new money. Add the investment and you get the post-money valuation. The price per share comes from the pre-money valuation divided by the fully diluted share count, and that count often includes an enlarged option pool. That’s why the headline valuation can hide real dilution.
Which terms deserve the most attention?
- Liquidation preference and participation. They decide who gets paid in a modest sale.
- Option pool. If it must be topped up before the round, founders bear it.
- Board control. Who appoints the board after the round, and whether there’s an independent seat.
- Protective provisions. What you can no longer do without investor consent.
- Founder vesting. Whether your shares, or some of them, start vesting again.
What happens after signing?
The lead investor’s counsel usually drafts the definitive documents: articles of amendment creating the preferred shares, a share subscription agreement, and a shareholder agreement (often a unanimous shareholder agreement under section 108 of Ontario’s Business Corporations Act). Due diligence runs in parallel. The round closes when the documents are signed, the money arrives and shares are issued under a prospectus exemption.
Should I get legal advice before signing?
Yes, ideally before you agree the headline terms by email. The term sheet sets the frame, and arguing to change it in the definitive documents is harder. See what is a lead investor?
We review term sheets and financing documents; that work is quoted before it starts. See contract review, investor due diligence prep and our fees.
This guide is general information about Ontario and Canadian law, not legal advice for your situation. To review a term sheet, book a free 15-minute consult.