The term sheet is the most important document of the early funding phase. Although it is usually not legally binding, it sets the framework for the entire investment agreement. Whoever negotiates carelessly here often pays a high price later at exit.
What a term sheet covers
A term sheet summarises the economic and legal cornerstones of a funding round: valuation, investment amount, shareholding, voting rights and protective clauses. It serves as the basis for the later shareholders' agreement. Founders should not treat it as a mere formality.
Valuation and dilution
The pre-money valuation determines how many shares you give up for the fresh capital. But the bare figure can be deceptive: a high value may come at the cost of harsh protective clauses. Always look at the overall package and map your shares cleanly in your cap table.
The liquidation preference: the hidden lever
Hardly any clause is as underestimated as the liquidation preference. It governs who receives money first at exit and how much. A 1x non-participating preference is founder-friendly. A 2x participating preference, however, can mean investors skim off most of the proceeds in a mid-sized exit. Negotiate hard here.
Vesting and control rights
Investors almost always demand vesting of founder shares, typically over four years with a one-year cliff. Watch out for acceleration clauses on a sale. Reserved matters and veto rights shift power within the company. For solid guidance, early advice on startup financing pays off, especially in the first institutional venture capital round.
FAQ
Is a term sheet legally binding? Usually not on the economic points, but it has strong binding effect in practice. What is agreed here is rarely renegotiated.
Should I involve an advisor before signing? Absolutely. An experienced advisor spots unfavourable clauses immediately and knows market terms.
How long does negotiation take? From first talks to a signed term sheet often takes two to six weeks. Do not let yourself be rushed.