TechAngels

What is a term sheet? Explained clause by clause

By TechAngels · Published 17 July 2026

Flat illustration of a contract document with highlighted clause lines, a signature, a round seal and a pen.

A term sheet records the commercial basis on which an investor and founder intend to complete a financing. It normally identifies the amount, valuation or conversion mechanics, ownership consequences and investor rights before the definitive contracts are drafted.

Signing it is not the same as receiving the money. Some provisions may be expressly binding, the investment can still change after diligence, and the company must complete the corporate and contractual steps required by the governing law. This article is a reading framework, not a model document or legal opinion.

Binding vs non-binding: read this part first

Treat a term sheet as two documents stapled together. The commercial terms (valuation, amount, liquidation preference, board seats and the rest) are almost always non-binding: they express intent, and either side can walk away or renegotiate until the definitive agreements are signed. A small set of clauses binds from signature, and you should identify them first. The usual binding ones are exclusivity (also called no-shop), confidentiality, and who pays the transaction costs. The document states which clauses bind; if it does not say clearly, ask before signing.

The practical takeaway: a signed term sheet is a strong commercial commitment, but the number you signed is a starting point for the legal drafting, not a guarantee, and the binding clauses can constrain you even if the deal never closes.

The clauses a founder actually negotiates

Valuation: pre-money and post-money

Pre-money valuation is what the investor agrees your company is worth before their money goes in. Post-money is pre-money plus the new investment. The distinction decides how much of the company you sell: the investor’s ownership is their cheque divided by the post-money valuation. A €200,000 investment on a €800,000 pre-money means a €1,000,000 post-money and 20% sold; the same cheque on an €800,000 post-money means 25% sold. Confirm which basis a number refers to, and watch for an option pool added to the pre-money figure, because a pool created before the round dilutes founders rather than the incoming investor.

What is standard at angel stage: valuations vary widely by team, traction and sector, so there is no single right number. What matters is that the basis is explicit and the dilution math is one you can live with across future rounds.

Check before agreeing: Does every valuation state whether it is pre-money or post-money? Is a new option pool included, and who bears that dilution?

Investment amount and instrument

The term sheet states the amount and the instrument, meaning the legal form the money takes. The two common forms at this stage are priced equity (the investor buys shares now at an agreed valuation) and convertible instruments (the money goes in now and converts into shares at a later priced round, usually with a discount or a valuation cap). Convertible notes, often structured under a convertible loan agreement (CLA), and SAFEs are common international reference points, but their implementation and consequences depend on the company and governing law. Ask what happens if no qualified financing, sale or maturity event occurs.

Check before agreeing: Is the instrument identified? Are the cap, discount, maturity, interest and conversion events complete and internally consistent?

Liquidation preference

A liquidation preference decides who gets paid first, and how much, if the company is sold or wound up. A “1x non-participating” preference means the investor gets their money back before common shareholders, then chooses either that return or their pro-rata share of the proceeds, whichever is larger, not both. A participating preference means they take their money back and also share in what remains, which can leave founders with markedly less in a modest exit.

A 1x non-participating preference is commonly described as the founder-friendlier reference point because the investor does not receive both the preference and a further pro-rata share. Whether it is appropriate depends on the company, instrument and rest of the terms.

Model the exit proceeds: Multiples above one and participating preferences can materially reduce what founders and employees receive in a modest sale. Calculate several sale prices rather than judging the clause by its label.

Anti-dilution

Anti-dilution protects the investor if you later raise at a lower valuation (a down round) by adjusting the price at which their earlier shares convert. “Broad-based weighted average” is the mild, common form: it softens the blow proportionally. “Full ratchet” is the harsh form: it reprices the investor’s shares as if they had paid the new, lower price, transferring a large slice of ownership from founders.

Compare the formulas: A full ratchet can produce substantially more founder dilution than a weighted-average adjustment. Ask the lawyer to demonstrate both using the same down-round example.

Founder vesting

Vesting means that continued ownership of part of a founder’s stake depends on remaining with the company over an agreed period. If a founder leaves, the documents specify what happens to the unvested portion. International venture documents often use a multi-year schedule and a one-year cliff, but the mechanism must be drafted for the company’s jurisdiction and existing ownership structure.

Negotiate the starting point: Check whether founders receive credit for time already worked and distinguish voluntary departure, dismissal and incapacity rather than treating every departure identically.

Board composition

This clause sets who sits on the board and therefore who controls major decisions. At angel stage many rounds leave founders with a board majority, sometimes adding one investor seat or an agreed independent director. The balance matters more than the headcount, because the board hires and fires the CEO and approves budgets and future financings.

Test control, not just headcount: Identify who can appoint and remove each director, how deadlocks work and whether an early minority investor can control the board.

Protective provisions and veto rights

Protective provisions are decisions the company cannot take without investor consent, regardless of the board vote: issuing new shares, taking on debt above a threshold, selling the company, or changing the rights attached to shares. A focused list protecting the investor against being diluted or overruled on fundamental matters is normal. The risk is scope creep.

Define thresholds: Consent rights over fundamental actions are different from approval of ordinary hiring, routine spending and customer contracts. Vague or low thresholds can make normal operations dependent on investor permission.

Pro-rata rights

A pro-rata right lets an existing investor put more money into future rounds to maintain their percentage ownership. For a supportive angel this is reasonable, and it signals they intend to keep backing you. The thing to watch is a “super pro-rata” right that lets one investor take an outsized share of a future round and crowd out new investors you may want.

Read the allocation mechanics: A super pro-rata right or broad right of first refusal can limit room for a valuable new investor in the next financing.

Exclusivity and confidentiality

These are the clauses most likely to be binding immediately. Exclusivity (no-shop) stops you from talking to other investors for a defined period while this deal is worked out. Keep that period short and time-boxed, because it removes your leverage and pauses your fundraising if the deal stalls. Confidentiality binds both sides to keep the terms and any shared information private. A mutual confidentiality clause is standard and reasonable.

Put dates and parties on the obligations: Exclusivity should expire on a defined date. Check whether confidentiality is mutual, what information it covers and which disclosures to advisers or other investors remain permitted.

What happens after you sign

Signing the term sheet starts the closing process, it does not end it. Two things follow. First, due diligence: the investor verifies what the term sheet assumed, reviewing your cap table, contracts, intellectual property, key hires and finances. Clean records make this fast; surprises here are where deals slow down or reprice. Second, the definitive legal documents, typically a share subscription or investment agreement and a shareholders’ agreement, which turn the term sheet’s bullet points into binding, detailed contracts. Every clause above is written out in full there, so the term sheet you negotiated is the frame the lawyers build on.

Because these documents are governed by local company and contract law, the specifics of enforceability, tax treatment and required corporate steps in Romania should be confirmed with a qualified Romanian lawyer or tax adviser before you sign. Several of these clause patterns come from US and UK venture practice, and implementing them in a Romanian SRL is not always one-to-one; your lawyer will tell you what translates directly and what needs restructuring. TechAngels plans a document library with reviewed model templates and clause explainers to help founders read these terms with more confidence; see the document library when it is available.

Review the economics as a whole

A clause can look acceptable on its own and produce a poor result when combined with the rest. Before signing, model at least:

  • founder and investor ownership immediately after the round;
  • dilution from the option pool;
  • ownership after a plausible later financing;
  • proceeds in a low, medium and high-value sale;
  • the decisions requiring board or investor consent;
  • what happens if the proposed financing never closes.

Mark which provisions are binding and the law that governs them. Confirm who pays legal and transaction costs if the deal stops. Keep a written list of points deferred to the definitive documents; “the lawyers will handle it” is not an agreement on substance.

Several concepts above come from US and UK venture practice. Their implementation in a Romanian SRL is not necessarily one-to-one, particularly for share classes, founder vesting, corporate approvals and board powers. A qualified Romanian lawyer should review the actual documents and explain the enforceable result before signature.

After the term sheet, the investor completes due diligence and the parties negotiate the subscription or investment agreement, shareholders’ agreement and required corporate resolutions. The signed term sheet is the negotiating frame; the definitive documents are what ultimately govern the investment.