When you’re raising capital, few documents will shape your company’s future as much as the term sheet. It may be only a few pages long and technically non-binding, but its implications are anything but informal.
This is where critical decisions about valuation, control, and incentives are made. Decisions that will affect your company's path for years to come.
This guide outlines what a term sheet is, why it matters, and what you, as a founder, should focus on before signing.
Martin Sjøhaug Eriksen, Investment Director at Viking Growth
A term sheet is a non-binding document that outlines the key terms and conditions under which an investor intends to invest. It sets the tone and structure for the final investment agreement and helps both sides align on the big questions early, before entering into due diligence or legal discussions.
Typically, the term sheet marks the first formal step in the investment process after initial meetings and mutual interest. It covers essential issues such as valuation, ownership, governance, timelines, and the rights and responsibilities of both parties.
Think of it as the blueprint for your deal. If you can’t align on the fundamentals here, the deal will most likely not happen.
Before you sign anything, here are the core elements to scrutinize, and why they matter:
Make sure you understand how your company is being valued, not just how
much it's worth. Is the valuation based on current trading, future projections, or comparable companies? Are there secondary sales involved (where founders or early investors sell shares), or is it all primary (new capital into the company)?
Look beyond headline valuation. A high valuation with complex terms, such as liquidation preference, can be less attractive than a lower valuation with simpler terms.
Beware of deals that look great on the surface but contain hidden “bells and whistles” — for example, multiple share classes with different rights, or preferential payouts. These can drastically affect outcomes in an exit.
As a founder, model different scenarios: What happens if you exit at a lower-than-expected price? Who gets paid first? How much would you walk away with? Simple, clean structures with aligned incentives are often worth accepting a slightly lower valuation.
Pay attention to the board structure, voting rights, and other governance elements. Once agreed on paper, these are hard to unwind. It’s especially important in minority investments, where you're not giving up control but do need to work closely with your investor.
This clause determines who gets paid first in a sale or liquidation and how much. Some investors require getting 3 times their money back before they receive anything from a company sale. Then it is important to model different outcomes to see whether you are comfortable with all scenarios. Understand what you’re agreeing to.
If part of your deal includes earn-outs, future payments based on hitting milestones, it should be realistic targets. What if you fall slightly short? Are you in a position to decide financial outcomes, or is that a right the new investor has, e.g., by adding costs and reducing profitability? Many earn-outs are never paid in full. If the earn-out is too large a share of the total deal, the risk shifts heavily to the founder.
The term sheet is the best moment to negotiate the deal’s fundamentals: valuation, ownership structure, board composition, and key rights. These are the levers that shape everything else, so don’t leave them for the final agreement. If you wait until due diligence is complete, you'll have far less leverage.
Once these are locked in, the rest of the process becomes much more about execution and detail.
Every term sheet is a fork in the road. The decisions you make now will influence your next funding round, your exit options, and your relationship with investors. Consider:
Every deal involves trade-offs. Here's a simple principle: Favor clean structures, shared rights, and aligned incentives over squeezing out the highest valuation.
If you’re in a situation where it’s your company on the line, these are often worth compromising on:
✅ A slightly lower valuation
✅ Equal rights between new and existing shareholders
✅ No earn-outs or limited earn-outs with achievable milestones
✅ Clear and simple governance
And here are the red flags to avoid:
🚩 Complex share classes with different rights
🚩 Multiple liquidation preferences
🚩 Long earn-out periods with unrealistic targets
🚩 Misaligned time horizons with investors
The term sheet is not just a legal document. It's a reflection of your relationship with your investors, and the future you're building together. Founders who approach it with clarity, realism, and a long-term mindset are far better positioned to succeed.
Get advice, model scenarios, and don’t be afraid to push for clarity. A good investor will welcome tough questions; they want to work with founders who understand the business and protect its future.
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