A term sheet is a document, ranging from 1 to 10 pages, that serves as a summary of the more detailed investment agreements to come - the shareholders' agreement and articles of association.

Although it’s not legally binding, it can be difficult to renegotiate terms after you’ve signed the term sheet. That’s why it’s important to not only understand the terms and their implications, but also to negotiate where necessary.

The term sheet is the pivot between pitching and getting money in the bank – a process that usually takes between 6 and 12 months. It confirms that investors are ready to invest, but it’s not a final agreement: both parties need to negotiate and agree to the terms of a possible deal.

The way you negotiate your term sheet will help to set the tone for the rest of your relationship with the investor – but how do you know what’s up for debate?

It’s best to focus on the terms that matter most to you – your “deal killers” – and to take a considered but reasonable approach to the rest.

Although a VC term sheet is non-binding in many respects, this plan will serve as a guide for your investor agreements going forward, so it’s important to understand which terms are most important to you and the business.

If you are uncertain about which terms to prioritise, work with a trusted advisor or an experienced startup lawyer to identify those that will help you the most. Typically, however, the most important points are:

• Valuation/dilution - Valuation (and associated dilution) is probably the most important and heavily negotiated term in a term sheet. It determines the percentage ownership of the company the investors are buying with their investment.
• Liquidation preference - This determines the order in which proceeds are paid out on a liquidity event. Take the time to model various anticipated exit values to understand the actual dollar differences between the various liquidation preference options presented in the document.
• Option pools - An option pool consists of shares or share options reserved to incentivise employees. Creating an option pool results in dilution for the shareholders and directly impacts the price per share (i.e. valuation). Crucially, working out option pools pre- or post-money has a direct impact on the way both new and existing shareholders are diluted.
• Board control - Investors often ask to have a representative on the Board so they can have their say in key business decisions. It is worth considering their experience and the value they may add to the company, and how these representatives could affect the composition of the Board.
• Founder vesting - Founder vesting is the process by which founders earn their shares back over a period of time following a fundraise. There are several elements to consider, such as the vesting commencement date and duration of the vesting period.
• Anti-dilution protection - Nearly all deals have some provisions to protect the VC from dilution. Most are reasonable, but terms like “full ratchet” may be a sign to get expert advice or even reconsider the deal.
• Exclusivity - This is a standard condition that means you cannot talk to other investors for a specific period after you sign the term sheet. This gives the investor time to do their due diligence, but make sure it isn’t too long – generally, 30-45 days is about right.

If you have multiple offers, you may have more leverage to tilt the terms in your favour, but in general being flexible is helpful in building a healthy working relationship.

However, it’s equally important to make sure you understand the implications of every aspect of the term sheet. Working with a lawyer or advisor is essential.