Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
      • Leading Change and Organizational Renewal
      • Dynamic Teaming
      • Transforming Customer Experiences
    • Credential of Leadership, Impact, and Management in Business (CLIMB)
    • Credential of Digital Innovation and Strategy
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
      • Launching Tech Ventures
      • Winning with Digital Platforms
      • Leading Change and Organizational Renewal
      • Entrepreneurial Marketing
      • Transforming Customer Experiences
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Marketing
      • Digital Marketing Strategy
      • Creating Brand Value
      • Entrepreneurial Marketing
      • Personal Branding
    • Digital Transformation
      • Winning with Digital Platforms
      • AI Essentials for Business
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
      • Strategic Financial Analysis
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
      • Business and Climate Change
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
    • Insights
      Open Insights Mega Menu
      • Business Insights Blog
        • Career Development
        • Communication
        • Decision-Making
        • Earning Your MBA
        • Entrepreneurship & Innovation
        • Finance
        • Leadership
        • Management
        • Negotiation
        • Strategy
      • All Topics
      • Learner on computer exploring HBS Online business lessons
        Sample Business Lessons and E-Books

        Gain new insights and knowledge from leading faculty and industry experts.

      • HBS Online Parlor Room podcast logo
        Podcast

        The Parlor Room: Where business concepts come to life. Listen now on your favorite podcast platform.

    • More Info
      Open More Info Mega Menu
      • Learning Experience
        Master real-world business skills with our immersive platform and engaged community.
      • Certificates, Credentials, & Credits
        Learn how completing courses can boost your resume and move your career forward.
      • Learning Tracks
        Take your career to the next level with this specialization.
      • Financing & Policies
        • Employer Reimbursement
        • Payment & Financial Aid
        • Policies
      • Connect
        • Student Stories
        • Community
      • Need Help?
        • Frequently Asked Questions
        • Request Information
        • Support Portal
      • Enroll Now
    Login
    My Courses
    Access your courses and engage with your peers
    My Account
    Manage your account, enrollment, and payments.
    HBS Home
    • About HBS
    • Academic Programs
    • Alumni
    • Faculty & Research
    • Baker Library
    • Giving
    • Harvard Business Review
    • Initiatives
    • News
    • Recruit
    • Map / Directions
    HBS Online
    • Courses
    • Business Essentials
    • Leadership & Management
    • Credential of Leadership, Impact, and Management in Business (CLIMB)
    • Credential of Digital Innovation and Strategy
    • Entrepreneurship & Innovation
    • Strategy
    • Marketing
    • Digital Transformation
    • Finance & Accounting
    • Business in Society
    • For Organizations
    • Insights
    • More Info
    • About
    • Support Portal
    • Media Coverage
    • Founding Donors
    • Leadership Team
    • Careers
    • My Courses
    • My Account
    • Enroll Now
    • …→
    • Harvard Business School→
    • HBS Online→
    • Business Insights→

    Business Insights

    Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

     
    Filter Results Arrow Down Arrow Up

    Topics

    Topics

    • Accounting
    • Analytics
    • Business Essentials
    • Business in Society
    • Career Development
    • Communication
    • Community
    • ConneXt
    • Decision-Making
    • Digital Transformation
    • Earning Your MBA
    • Entrepreneurship & Innovation
    • Finance
    • For Organizations
    • Leadership
    • Management
    • Marketing
    • Negotiation
    • News & Events
    • Productivity
    • Staff Spotlight
    • Strategy
    • Student Profiles
    • Technology
    • Work-Life Balance

    Courses

    Courses

    • AI Essentials for Business
    • Alternative Investments
    • Business Analytics
    • Business Strategy
    • Business and Climate Change
    • CLIMB
    • CORe
    • Creating Brand Value
    • Credential of Digital Innovation and Strategy
    • Design Thinking and Innovation
    • Digital Marketing Strategy
    • Disruptive Strategy
    • Dynamic Teaming
    • Economics for Managers
    • Entrepreneurial Marketing
    • Entrepreneurship Essentials
    • Financial Accounting
    • Global Business
    • Launching Tech Ventures
    • Leadership Principles
    • Leadership, Ethics, and Corporate Accountability
    • Leading Change and Organizational Renewal
    • Leading with Finance
    • Management Essentials
    • Negotiation Mastery
    • Organizational Leadership
    • Personal Branding
    • Power and Influence for Positive Impact
    • Strategic Financial Analysis
    • Strategy Execution
    • Sustainable Business Strategy
    • Sustainable Investing
    • Transforming Customer Experiences
    • Winning with Digital Platforms
    Subscribe to the Blog
    *
    Please complete this required field.
    Email must be formatted correctly.
    Please complete all required fields.
    RSS feed

    Filters

    Topics

    Topics

    • Accounting
    • Analytics
    • Business Essentials
    • Business in Society
    • Career Development
    • Communication
    • Community
    • ConneXt
    • Decision-Making
    • Digital Transformation
    • Earning Your MBA
    • Entrepreneurship & Innovation
    • Finance
    • For Organizations
    • Leadership
    • Management
    • Marketing
    • Negotiation
    • News & Events
    • Productivity
    • Staff Spotlight
    • Strategy
    • Student Profiles
    • Technology
    • Work-Life Balance

    Courses

    Courses

    • AI Essentials for Business
    • Alternative Investments
    • Business Analytics
    • Business Strategy
    • Business and Climate Change
    • CLIMB
    • CORe
    • Creating Brand Value
    • Credential of Digital Innovation and Strategy
    • Design Thinking and Innovation
    • Digital Marketing Strategy
    • Disruptive Strategy
    • Dynamic Teaming
    • Economics for Managers
    • Entrepreneurial Marketing
    • Entrepreneurship Essentials
    • Financial Accounting
    • Global Business
    • Launching Tech Ventures
    • Leadership Principles
    • Leadership, Ethics, and Corporate Accountability
    • Leading Change and Organizational Renewal
    • Leading with Finance
    • Management Essentials
    • Negotiation Mastery
    • Organizational Leadership
    • Personal Branding
    • Power and Influence for Positive Impact
    • Strategic Financial Analysis
    • Strategy Execution
    • Sustainable Business Strategy
    • Sustainable Investing
    • Transforming Customer Experiences
    • Winning with Digital Platforms
    Subscribe to the Blog
    *
    Please complete this required field.
    Email must be formatted correctly.
    Please complete all required fields.
    RSS feed

    How to Create a Term Sheet for Investors

    An entrepreneur seated at a desk studying a business document
    • 01 Aug 2023
    Esther Han Author Contributors
    tag
    • Entrepreneurship & Innovation
    • Entrepreneurship Essentials
    • Launching Tech Ventures
    • Negotiation
    • Negotiation Mastery

    After coming up with an innovative business idea, pitching to investors, and finding capital options, the task of securing funding can seem daunting. Creating a term sheet is one tool you can use to ease the process. With the document, you can attract prospective investors and generate competition to ensure you get the best deal.

    If you want to successfully fund your startup, here’s an overview of how to create a term sheet for investors.


    Free E-Book:
    So You Want to Be an Entrepreneur: How to Get Started

    Access your free e-book today.

    DOWNLOAD NOW

    What Is a Term Sheet?

    According to the online course Launching Tech Ventures, a term sheet is a preliminary, non-binding document between an entrepreneur and investor that outlines a financing deal. It’s the first take of the proposed agreement’s terms and conditions.

    Since a term sheet is non-binding, you can use it as a blueprint of your final agreement. The document has two important aspects:

    1. Economics: Factors such as valuation, option pool, and liquidation preference
    2. Control: How much control investors have over business decisions

    Whether you or your investor create the term sheet, pay close attention to both aspects to ensure you retain control of your business.

    “Most venture firms have a standard term sheet,” says Harvard Business School Professor William Sahlman in the online course Entrepreneurship Essentials. “They’ll likely want to use a convertible preferred stock with a liquidation preference.”

    You can also issue a term sheet with preset conditions to attract potential investors and start negotiations.

    As a founder, it’s crucial to be prepared to pitch your business idea to investors with a term sheet. Here are four steps to create one.

    4 Steps to Create a Term Sheet

    1. Understand the Content

    First and foremost, it’s essential to understand a term sheet’s content. According to Entrepreneurship Essentials, the document includes the:

    • Investment amount
    • Timing
    • Company valuation
    • Form of investment
    • Stock option plans
    • Parties’ rights and responsibilities
    • Board representation
    • Time frame for deal completion

    Comprehending these requires deeply understanding your business and investment requirements. Dedicate effort to identifying the amount of funding you must ask for, the type of investment you seek, and your company’s valuation. Doing so can ensure your term sheet accurately reflects your business needs and facilitates productive discussions with potential investors.

    If understanding the term sheet’s content feels overwhelming, share the responsibility with a business partner or an advisor. Alternatively, you can decide what factors are essential to your goals and focus on those first.

    2. Study the Terms and Conditions

    As with any business document, it’s vital to understand the terms and conditions.

    The most fundamental in a term sheet are:

    • Valuation: The company’s worth before and after investment.
    • Preferred stock: A type of equity security investors purchase containing liquidation preferences and voting rights.
    • Liquidation preference: The right for preferred shareholders to get their investments back before the distribution of sale or liquidation proceeds.
    • Protective provisions: Provisions that give investors a say in business actions, such as taking on debt or issuing new shares.
    • Pro rata rights: Rights that give investors a means to avoid dilution and maintain ownership by participating in future funding rounds.

    These factors protect both you and your investors, but they aren’t always part of the agreement.

    “If everything goes well, most control terms don’t come into play,” says HBS Senior Lecturer Jeffrey Bussgang in Launching Tech Ventures. “But when things go poorly and there are disagreements, the documents determine who’s in the driver’s seat and has the power to make major decisions.”

    It’s critical to ensure you’re pleased with the term sheet’s initial draft. Once signed, it’s intended to protect your best interests.

    Launching Tech Ventures | Build a viable, valuable tech venture that can profitably scale | Learn More

    3. Get a Lawyer

    Garnering what Bussgang calls service providers—companies or individuals that offer specialized support to entrepreneurs during different stages—is another essential step in the term sheet process. Examples outlined in Launching Tech Ventures include accounting, real estate, and recruiting firms.

    Among the most valuable service providers when drafting a term sheet is a lawyer. Working with one who specializes in your field can make a significant difference.

    “You, as the entrepreneur, need to have enough familiarity with these terms to make good decisions that are in your company’s best interests,” Bussgang says in Launching Tech Ventures. “And you should find a good lawyer early in the process who can help you navigate these complicated waters.”

    An experienced attorney can help you understand your term sheet before making any legal commitments, ensuring you protect your interests and demonstrate professionalism to potential investors.

    “The term sheet is used to lay out the important terms to be agreed to between business people,” Bussgang says in Launching Tech Ventures, “so lawyers can draw up and finalize the definitive agreement that represents the legally binding shareholder purchase agreement.”

    4. Prepare to Negotiate

    Negotiation is crucial to creating a term sheet. You often analyze and alter the document based on negotiations to solidify its final, legally binding terms and conditions.

    In addition to finding a good lawyer, Launching Tech Ventures advises taking the following steps to prepare for a negotiation with a venture capitalist firm:

    • Decide which of the term sheet’s elements are most important.
    • Communicate your desires before issuing the document.
    • Create competitive tension by doing research, networking, and talking with investors.
    • Focus on issues that help or hinder your chances of reaching your desired outcome.

    Creating value for both you and your investors is critical.

    “Value creation is a key part of the negotiation process,” says HBS Professor Michael Wheeler in the online course Negotiation Mastery. “If it's done well, it can turn stalemates into deals and transform good deals into great ones.”

    Which HBS Online Entrepreneurship and Innovation Course is Right for You? | Download Your Free Flowchart

    Learn How to Create a Term Sheet

    Creating a term sheet can be intimidating, but it offers immense benefits. Using the document, you can establish control over your business, create open lines of communication with potential investors, and enhance the startup fundraising process.

    To reap these benefits, consider enrolling in an online course, such as Launching Tech Ventures. Whether you’re a founder, a joiner, or an investor, the course can enable you to better understand the startup ecosystem through real-world, case-based examples featuring industry-leading experts.

    Ready to learn more about term sheets and the startup world? Explore Launching Tech Ventures, Entrepreneurship Essentials, and Negotiation Mastery—three of our entrepreneurship and innovation courses—to learn how to assess business opportunities and transform your idea into a viable venture. Download our free course flowchart to determine which is right for you.

    About the Author

    Esther Han is a marketing professional and contributing writer for Harvard Business School Online. She has a passion for design, photography, and the written word. One of her bucket list items is to travel to every country in the world; she's been to 40 so far.
     
    All FAQs

    Top FAQs

    How are HBS Online courses delivered?

    +–

    We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

    Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

    Are HBS Online programs available in languages other than English?

    +–

    We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English.

    All course content is delivered in written English. Closed captioning in English is available for all videos. There are no live interactions during the course that requires the learner to speak English. Coursework must be completed in English.

    Do I need to come to campus to participate in HBS Online programs?

    +–

    No, all of our programs are 100 percent online, and available to participants regardless of their location.

    How do I enroll in a course?

    +–

    Certificate Programs

    HBS Online welcomes committed learners wherever they are—in the world and their careers—irrespective of their professional experience or academic background. To extend the reach of HBS Online, we no longer require an application for our certificate programs. (Applications are still required for our credential programs: CORe and CLIMB.) You can now immediately enroll and start taking the next step in your career.

    All programs require the completion of a brief online enrollment form before payment. If you are new to HBS Online, you will be required to set up an account before enrolling in the program of your choice.

    Our easy online enrollment form is free, and no special documentation is required. All participants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

    Updates to your enrollment status will be shown on your account page. HBS Online does not use race, gender, ethnicity, or any protected class as criteria for enrollment for any HBS Online program.

    Credential Programs

    HBS Online's CORe and CLIMB programs require the completion of a brief application. The applications vary slightly, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

    Our easy online application is free, and no special documentation is required. All participants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

    Updates to your application and enrollment status will be shown on your account page. We confirm enrollment eligibility within one week of your application for CORe and three weeks for CLIMB. HBS Online does not use race, gender, ethnicity, or any protected class as criteria for admissions for any HBS Online program.

    Does Harvard Business School Online offer an online MBA?

    +–

    No, Harvard Business School Online offers business certificate programs.

    What are my payment options?

    +–

    HBS Online offers a variety of payment methods to provide flexibility, including:

    • Credit and debit cards (Visa, MasterCard, Discover, and AMEX)
    • PayPal
    • Wire transfers
    • Western Union
    • Bank loans (When available)

    You may split your payment across two credit card transactions or send a payment link to another individual to complete payment on your behalf. A minimum payment of $350 is required for the first transaction.

    Some learners may also qualify for scholarships or financial aid, which will be credited against the program fee once eligibility is determined. Please refer to the Payment & Financial Aid page for more information.

    What are the policies for refunds and deferrals?

    +–

    After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

     

    Sign up for News & Announcements


    • • Please complete this required field.
    • • Email must be formatted correctly.
    • • Please complete all required fields.

    Subject Areas

    • Business Essentials
    • Leadership & Management
    • Entrepreneurship & Innovation
    • Strategy
    • Marketing
    • Finance & Accounting
    • Business & Society
    • Digital Transformation

    Quick Links

    • FAQs
    • Contact Us
    • Request Info
    • Enroll Now
    • Support Portal

    About

    • About Us
    • Media Coverage
    • Founding Donors
    • Leadership Team
    • Careers @ HBS Online

    Legal

    • Legal
    • Policies
    Harvard Business School
    Copyright © President & Fellows of Harvard College
    • Site Map
    • Trademark Notice
    • Digital Accessibility