A term sheet is the roadmap for an equity investment. It is not (and should never become) the definitive legal agreement, but the document that sets the commercial and legal tone for everything that follows. It should reduce misunderstanding, accelerate the raise and save legal fees. However, if it’s drafted in a vague manner, it can lead to disputes, re-negotiation during long-form drafting or, worst of all, a lost investor.
Plenty of term sheet template downloads circulate on the internet, yet most are written for the US market or omit provisions that matter in the UK. Below we outline some of the clauses every founder should expect to negotiate. Use this as a sense-check, but it’s not a replacement for bespoke advice. If you consult with an experienced solicitor, they will flag the not-so-obvious tweaks that protect value in your particular deal.
Headline Commercial Terms
Investors and Founders must agree on the core numbers first, because every other clause builds on them. Here are some key money mechanics to pin down. You may need to involve your CFO or accountant:
Investment Amount and Price Per Share
Be clear about your current cap table and whether any team members have been issued rights under option agreements or other ‘option pool’ type arrangements.
State, if you can at that point in time the amount to be invested, the share class to be issued and the price per share.
Pre-money or Post-money Valuation
VC term sheets usually quote a pre-money valuation; angel sheets sometimes use post-money. Clarify which figure you are using and show the implied percentage of fully diluted share capital the investor will own on completion after any convertible debt or similar rights have been exercised.
Use of Proceeds
Sophisticated investors want comfort that their funds will grow the business, not disappear into legacy liabilities. A brief paragraph highlighting the headline budget, including product development, marketing, and key hires, demonstrates transparency.
Economic Protections for Investors
Once price and valuation are agreed, investors focus on downside cover. They want comfort that, if things go wrong or growth slows, their capital remains preferred, and their percentage is not unfairly eroded. The most common financial safeguards are as follows:
Liquidation Preference
State the preference multiple (1× is common) and whether it is “non-participating” (investor chooses between the preference or sharing pro rata) or “participating” (investor takes the preference and then shares any surplus). UK growth deals commonly use a 1× non-participating preference to align founder and investor incentives.
Antidilution Mechanism
If the next round is priced below the current round (“down-round”), an antidilution clause adjusts conversion ratios to protect investors. Full-ratchet protection heavily penalises founders. The more balanced UK norm is a weighted-average formula.
Dividend Policy
Startups rarely pay cash dividends, but the term sheet should confirm whether any preference shares carry a cumulative dividend and on what terms it converts to ordinary shares.
Control and Governance
Capital comes with strings, although it should have the minimum possible in early funding rounds. Investors like to have oversight of major decisions but usually accept that Founders run the day-to-day business. Balancing control with agility starts with three building blocks:
Board Composition
Set out the size of the board and who appoints each director. Investors often request one seat or an observer. The Term Sheet should state whether the Investor’s representatives are paid or not. Founders should ensure they retain at least equal voting power, unless the company is pivoting towards later-stage PE control.
Reserved Matters (Investor Consents)
A short list of decisions that require investor approval protects against unilateral moves that could devalue the company: issuing new shares, changing the business plan, or incurring large capital expenditures. Keep the list proportionate. Overly granular controls are counterproductive as they frustrate day-to-day management.
Information Rights
These should be kept to a minimum in early rounds, but there is an argument for Founders getting used to providing information early in the growth of the business. Quarterly management accounts, annual budgets and timely notice of material events keep Investors informed and (crucially) reduce “update fatigue” from ad-hoc requests.
Founder Commitments
Because Investors back people as much as products, they expect mechanisms that keep Founders engaged and aligned with growth targets. Key commitments often include:
Founder Vesting and Leaver Provisions
Investors want Founders to stay the course. A reverse-vesting period (often several years) means unvested shares are forfeited if a founder leaves early. There are often definitions of “good”, “bad” and “intermediate” leaver outcomes. The devil is in the detail of how much of a Founder’s shareholding is at risk and the price at which it can be clawed-back.
Restrictive Covenants
Founders usually covenant not to compete, solicit staff or poach customers for a fixed period after leaving. Covenants should be drafted narrowly so they are enforceable under UK restraint-of-trade principles.
Warranties
The Term Sheet should state whether warranties are to be given by the company only or the company and some of the Founders.
Exit-related Clauses
Every investor wants clarity on how and when they can realise a return. Founders need safeguards so exits happen on fair terms. Here are some critical exit provisions you should include to balance the needs of both:
Drag-along and Tag-along Rights
Investors need certainty they can deliver 100% of the company to a buyer. The term sheet should confirm the drag threshold. Seed deals may push for Founder control or a high percentage of voting shares in favour). Minority holders should be protected by a tag-along that ensures identical terms if the majority shareholders sell.
Employee and Option Matters
A credible option scheme attracts talent and gives investors confidence the team is incentivised without uncontrolled dilution. If the term sheet anticipates an option pool increase, state whether the pool is carved out of the pre-money or post-money valuation. The percentage difference can materially affect dilution.
Do Not Rely on Templates Alone
An online term sheet template is a starting point but it shouldn’t be relied on entirely. Templates rarely cover bespoke points such as:
- How an R&D tax-credit facility interacts with an investor’s debt-like preference
- The knock-on effects of EIS or SEIS reliefs on the liquidation preference
- Control approvals for regulated businesses
Legal advisers will flag these deal-specific quirks early, saving rewrites and safeguarding valuation.
Need Help Drafting a Term Sheet?
The commercial law solicitors at JPP Law are experienced in negotiating term sheets, acting for Founders, growth companies and investors. We’ll identify the clauses that protect your valuation, streamline Investor diligence and keep the deal on schedule. Book an introductory call to speak to a member of our legal team before you sign on the dotted line.
