Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Drafting a term sheet for a company you want to back is high risk.

Get it right, and you'll close the deal and look like a pro. Get it wrong, and you'll either scare off great founders or set yourself up for a world of hurt down the road.

There’s a lot of fancy verbiage in the Term Sheet Land, so we’re breaking down some of the most important concepts here.

Term Sheet Basics

A term sheet is your non-binding proposal to invest in a startup.

Key point: It's mostly non-binding, which means founders can still ghost you even after signing. But a few clauses (like no-shop and exclusivity) are legally binding, so don't phone it in.

Your term sheet serves three purposes:

1. Shows you're serious about investing
2. Sets expectations for the final deal structure
3. Kicks off due diligence and negotiations

The 3 pillars of every term sheet

Economics (The Money Stuff)

This is where you'll spend most of your time negotiating:

• Investment amount: How much you're putting in
• Pre-money valuation: What you think the company is worth before your check
• Post-money valuation: Determines your ownership percentage. (We wrote about pre- and post-money valuations here)
• Liquidation preference: When do you get paid relative to other shareholders in the event of an exit. Here, we wrote about this.

💡 Pro tip: Stick with 1x non-participating liquidation preference unless the market is really bad. Anything greedier makes you look like a vulture.

• Anti-dilution provisions: Protection against down rounds (weighted average is standard)
• Dividends: Usually 8% cumulative, but honestly, most startups never pay these anyway

Control

• Board composition: Negotiate for a seat if you're leading the round
• Protective provisions: Your veto rights over big decisions (be reasonable here)
• Pro rata rights: Option to invest in future rounds to maintain ownership
• Drag-along rights: Force minority shareholders to come along for exits
• Information rights: Monthly/quarterly updates (standard stuff)

✅ Reality check: Don't go overboard on control provisions. Nobody wants an investor who needs approval to change the office coffee brand.

Deal Structure

• Security type: Preferred shares for equity rounds, convertible notes for bridge rounds
• Option pool: Usually 10-20% post-money (negotiate this carefully — it affects your dilution)
• Participation rights: Whether your preferred shares also get common upside

Templates That Don't Stink

Don't reinvent the wheel. Start with proven templates:

• NVCA standard documents - The gold standard
• Y Combinator templates - Clean and founder-friendly
• Series Seed documents - Great for early-stage deals

How to Write Term Sheets That Actually Work

Keep it short and sweet. Founders are drowning in term sheets when deals are hot. A 2-page summary beats a 10-page legal document every time.

Lead with the headline numbers. Put investment amount, valuation, and ownership percentage at the top. Everything else is just details.

Use plain English. Save the legalese for the actual investment documents. Your term sheet should be readable by someone who didn't go to law school.

Be upfront about deal-breakers. If you need a board seat or specific protective provisions, say so clearly. Surprises during legal docs kill deals.

Set a reasonable deadline. 2-3 weeks is standard. Any longer and you'll lose momentum.

Negotiation Strategy (The Art of the Deal)

Remember: Founders have the most leverage before they sign your term sheet. Once they agree to your no-shop clause, the power dynamic shifts.

Common negotiation points:

• Valuation (obviously)
• Board composition
• Protective provisions
• Option pool size
• Liquidation preferences

Market dynamics matter. In hot markets, founders push back on everything. In cold markets, you can get more investor-friendly terms. Read the room.

Pick your battles. Be firm on terms that really matter to you, flexible on everything else. A reputation for being reasonable will serve you well.

Red Flags to Avoid

Don't be the greedy investor. I think you know what I mean here.

Don't over-engineer the control provisions. If you need to control every decision, you probably shouldn't be investing in startups.

Don't lowball on valuation just to test the founder. This isn't a negotiation tactic — it's just annoying.

Market Conditions Reality Check

When markets are hot:

• Valuations are inflated
• Terms favor founders
• Speed matters more than perfection

When markets are cold:

• You can get better terms
• Founders are more willing to negotiate
• But don't be a vulture — good founders have options

During downturns, you might see:

• Higher liquidation preferences
• Pay-to-play provisions
• More investor-friendly board control

After the Handshake

Once the term sheet is signed:

1. Due diligence begins (here, we wrote about this)
2. Lawyers draft the definitive documents
3. Final negotiations happen
4. Money changes hands

The Bottom Line

A great term sheet is like a great appetizer — it sets the tone for everything that follows. Be clear about what you want, fair in your terms, and professional in your approach.

Remember: You're not just investing in a company, you're starting a partnership that could last 10 years. Make sure your term sheet reflects the kind of investor you want to be.