Equity investors summarize the major terms associated with an equity investment on a term sheet. Legally it is a non-binding agreement used to clarify important details that when agreed upon will be used to create a much more detailed (and expensive to develop) binding contract that is signed upon investment.
Term Sheets Are Mostly Non-Binding
They are non-binding because investors typically have several “outs,” especially “subject to completion of due diligence.” Also, a term sheet offered by a lead investor often does not pledge enough capital to complete the round, and thus a syndicate must be formed to raise the targeted amount of cash. If your company has received a term sheet it is great news, but it does not mean you are done and the cash is on its way!
There are often terms that are binding on entrepreneurs in the term sheet: confidentiality and the “no-shop clause.” For a specified period of time the terms cannot be shared with other investors to try to get a better deal from another lead investor.
The best resource we’ve found for learning about term sheets is Venture Deals by Brad Feld and Jason Mendelson.