Term sheets explained: the terms that matter beyond the price.

A term sheet is a short summary of the main terms of an investment. Most of it is not legally binding, apart from clauses such as confidentiality and exclusivity, but it sets the shape of the final documents. Changing a term later is far harder than getting it right now, so take advice from a lawyer who does venture deals before you sign. In the UK, many investors start from the British Private Equity & Venture Capital Association (BVCA) model documents, which helps keep terms familiar.

Economic terms: who gets what

• Valuation and investment. The pre-money valuation, the amount raised and whether the option pool is counted before or after the money. A pool created in the pre-money valuation dilutes the existing shareholders, not the new investor. See option pool.
• Liquidation preference. On a sale, preference shareholders get their money back before ordinary shareholders. One times, non-participating, is the most common early-stage term in the UK. Participating preferences or multiples above one times shift a lot of value from tech founders to investors on smaller exits. Model it in the liquidation preference calculator.
• Anti-dilution protection. Protects investors if a later round is at a lower price. Broad-based weighted average is standard; full ratchet is harsh and worth resisting. See full ratchet and weighted average.
• Pre-emption and pro rata rights. The right to buy shares in later rounds to keep their percentage.
• Dividends. Usually none in early-stage deals. Watch for cumulative dividends, which quietly add to what investors take first.

Control terms: who decides

• Board composition. Who sits on the board and who appoints them. A common early-stage board is two tech founders and one investor, sometimes with an independent chair later.
• Investor consents. Decisions that need investor approval, such as issuing new shares, selling the company, taking on debt or changing the business plan. A reasonable list protects their money; a long list hands them a veto over day-to-day running.
• Information rights. Monthly management accounts, an annual budget and audited accounts. Our investor update builder makes the monthly report quick.
• Drag-along and tag-along. Drag lets a majority force everyone to sell on the same terms; tag lets minorities join a sale. See drag-along.

Terms about the founding team

• Founder vesting. Investors may ask that tech founders’ shares vest over three or four years, so a founder who leaves early does not keep everything.
• Good leaver and bad leaver. What happens to a leaving founder’s shares. Make sure the definitions are fair and that bad leaver is narrow.
• Restrictive covenants. Non-compete and non-solicit periods after you leave.
• Warranties. Statements you make about the company. Tech founders often give them personally, with a cap on liability, so check the caps.

Process terms

• Exclusivity. You agree not to talk to other investors for a period, often four to eight weeks. Keep it short and tied to a clear timetable.
• Conditions. Due diligence, documents and any approvals needed before completion.
• Costs. Who pays the investor’s legal fees. A capped contribution from the company is common.

How to negotiate

1. Decide your priorities before you see the term sheet: price, control, or speed and certainty.
2. Trade, do not just push back. Accept a slightly lower price for cleaner terms, for example.
3. Ask what is standard for this investor. Speak to tech founders they have backed, especially ones whose companies struggled.
4. Use advisers who know venture deals. It costs less than a bad term.

General information, not financial, legal or tax advice. Figures marked as rules of thumb vary by fund, sector and market conditions.