A term sheet is a non-binding agreement that sets out the basic terms and conditions under which an investment will be made. The term sheet allows the parties to reach agreement on the major deal points in advance of drafting the definitive investment documentation. A properly negotiated term sheet should make the legal process more efficient and cost-effective. Whilst the term sheet is non-binding, entrepreneurs and companies should note that is very difficult to negotiate out any terms previously agreed in the term sheet when preparing the definitive documents.
Unless you are a repeat entrepreneur or have dealt with the investor/venture fund ("VC") previously, it is advised that you should (particularly in the UK and Europe) avoid short form/two page term sheets or term sheets containing words such as “customary investor protections”, “market”, “usual” or “common”. This will ensure that the entrepreneur and the investor are both clear on the commercial agreement from the outset*. The danger of accepting a short-form term sheet, is that anything left unsaid is up for debate - this can increase legal costs and can also worsen an entrepreneur's bargaining position (particularly if the term sheet contains the usual exclusivity provisions).
For examples of a typical UK term sheet, please see the British Venture Capital Association (the trade body for private equity and venture capital in the UK) who have published a form term sheet for Series A investments or Seed Summit who have published a term sheet for early-stage investments. Some investors like Passion Capital have also published their form term sheets.
The Anatomy of a Term Sheet series can be found in full here
* See also Techcrunch's article on why longer term sheets are better here.