A signed term sheet records an investor’s intention to pursue a deal, usually with several conditions still unresolved. Founders should treat the money as uncertain until definitive agreements are signed and the funds reach the company’s bank account.
That distinction matters most after the apparent breakthrough. The round looks finished on the fundraising tracker. Hiring resumes. Other investors hear that the lead is committed. Then Tuesday arrives with another diligence request, a revised valuation discussion, or a message saying the investment committee needs more time.
The signature created momentum. It did not remove the exit ramp.
What the signature actually settles
A term sheet usually outlines the proposed economics and control terms of an investment: valuation, investment amount, liquidation preference, board composition, voting rights and other headline provisions. It gives the parties a shared basis for completing diligence and drafting the final documents.
Some provisions may be binding, particularly confidentiality, exclusivity, expenses or governing law. The central promise to invest, however, is commonly subject to conditions and further documentation. Exact enforceability depends on the wording and the applicable law, so founders need qualified legal advice on the document in front of them.
The practical reading is straightforward: a term sheet can narrow the negotiation without guaranteeing the closing.
That gap is easy to underestimate because the document carries many signals associated with completion. Lawyers are involved. Numbers appear on paper. Both sides sign. The team may have spent weeks answering questions and negotiating terms. Psychologically, the process feels too advanced to reverse.
Yet diligence can uncover problems. An investor’s internal approval can change. Market conditions can deteriorate. Another deal can absorb the fund’s attention or remaining capital. The parties can disagree over language that looked harmless in summary form. None of these possibilities disappears when the term sheet is signed.
Why founders start spending the round early
Fundraising creates a powerful commitment effect. After enough calls, document requests and partner meetings, the founder begins to act as though the outcome has already been earned.
The signed term sheet then becomes a mental finish line. Candidates receive verbal assurances about runway. A delayed contractor payment gets approved. The company commits to software, office space or a product launch based on the expected closing date.
This is where intention becomes operational risk.
A company that has six weeks of cash does not suddenly have eighteen months because a PDF reached everyone’s inbox. Until funds settle, the existing runway remains the real runway. Plans based on the proposed round belong in a conditional forecast, separate from obligations the company must meet with cash already available.
The same skepticism should apply to external narratives. Funding announcements compress a complicated process into a clean milestone, often leaving readers unable to distinguish between an agreed round and a completed one. Our guide to reading a Series A press release like a skeptic applies the same discipline: separate the reported event from the interpretation wrapped around it.
The protections that reduce closing risk
Founders cannot eliminate deal risk, but they can avoid increasing their exposure while the investment remains conditional.
Keep fundraising conversations alive until the money lands. Exclusivity terms may restrict what the company can formally pursue, so counsel should explain the exact boundary. Even within those limits, founders can preserve relationships and avoid telling the market that the process has ended before it has.
Run two operating plans. The first assumes the financing closes on the expected terms and date. The second assumes a delay or failed closing. The second plan should identify which hires pause, which payments cannot move, and how much time remains to secure another source of capital.
Track every remaining condition in writing. “Legal is working on it” hides too much. A useful closing list names the open item, the owner, the dependency and the date required. It should include diligence questions, corporate approvals, signatures, banking details and any investor conditions that remain outstanding.
Ask direct questions about internal approval. Has the investment committee approved the deal? Are any approvals still required? Is the allocation reserved? What findings could cause the investor to reconsider? A vague answer is information.
Also avoid irreversible announcements. Telling employees, candidates, customers or the press that the round is complete can create a second problem if the deal changes. Accurate language may sound less exciting, but “we signed a term sheet and are working toward closing” preserves the distinction that matters.
The closing standard worth adopting
A sensible internal rule is simple: no hiring, spending or public claims based on financing proceeds until those proceeds are available.
That rule can feel overly cautious when everyone expects the deal to close. It is still cheaper than unwinding commitments after an investor changes course. The downside of waiting a few days is usually limited. The downside of spending unavailable money can threaten payroll, negotiating power and the company itself.
A term sheet deserves serious attention. It may establish exclusivity, impose confidentiality duties and shape the final transaction. Treating it casually would be a mistake.
Treating it as cash creates a different mistake.
When the document arrives, mark the milestone. Then update the closing checklist, recalculate runway using the current bank balance, and keep Tuesday funded.
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