When entering investment negotiations for your business, the term sheet is where it all begins.

Term sheet, sometimes referred to as a term sheet table, outlines the foundational agreements between a startup and its potential investors. Acting as a blueprint, it details the terms of the investment and sets the tone for the business relationship.

In this guide, we’ll cover what a term sheet is, its key components, and negotiation tips to help ensure that the final agreement aligns with your business goals.

What Is a Term Sheet?

A term sheet is a non-binding document that serves as a roadmap for investment discussions between a company and potential investors. It outlines the proposed terms and conditions for the investment, offering clarity on the deal’s structure before binding agreements are drafted.

Key elements include the company’s valuation, the investment amount, the equity being offered, and governance details such as board composition and voting rights.

By clearly defining these factors, the term sheet sets the stage for formal contracts like shareholder agreements or purchase agreements.

What Does a Term Sheet Include?

While term sheets vary by industry, certain key elements are almost always included, such as financial terms, governance terms and investor protections.

1. Financial Terms

The valuation reflects your company’s worth to investors and determines how much equity you will need to give up.

For example, a £1 million valuation means that an investor offering £250,000 would typically receive 25% equity.

Investment Amount specifies the total funding the investor is ready to provide, directly influencing your company’s cash flow and growth potential.

Equity Offered defines the percentage of ownership being exchanged for the investment. Ownership levels directly affect your control over the company and profit-sharing arrangements.

2. Governance Terms

Board Composition specifies the structure of the board of directors, including how many seats investors control. It plays a crucial role in decision-making authority.

Voting Rights dictate shareholders’ influence over decisions like issuing new shares or major business changes.

Protective Provisions protect investors' interests by requiring their consent for significant company actions, such as mergers or raising additional funding.

3. Investor Protections

Liquidation Preferences determines the order and amount of payouts to investors in the event of a company sale, liquidation, or bankruptcy.

Employee Stock Options detail shares set aside for employees, which can help attract and retain talent.

Anti-dilution Provisions shield investors from dilution if new shares are issued at a lower price than they originally paid.

Example of a Term Sheet

Here is a simplified example of a term sheet for a startup raising funds through an equity investment. This example includes typical components and illustrates the structure and terms you might encounter in a real term sheet.

⚠️ This example demonstrates the structure and key terms often included in a term sheet. However, in real-world scenarios, additional clauses specific to the deal or industry might be included. Always consult a legal professional to draft or review term sheets to ensure they align with your goals and protect your interests.

[Startup Name] Term Sheet
Date: January 2, 2025

Parties:

1. Company: [Startup Name], a company incorporated under the laws of [Jurisdiction].
2. Investor: [Investor Name or Entity].

Proposed Investment Terms:

1. Basic Terms

• Investment Amount: £500,000
• Pre-Money Valuation: £2,000,000
• Post-Money Valuation: £2,500,000
• Equity Ownership: The investor will receive 20% equity in the company.

2. Governance

Board Composition:

• The board will consist of 5 members:
  • 2 appointed by the investors.
  • 3 appointed by the founders.

Voting Rights:

• Investors will have equal voting rights proportional to their equity.
• Certain key business decisions (e.g., mergers, new funding rounds) require investor approval.

3. Investor Protections

Liquidation Preference:

• The investor will receive 1x their investment amount (£500,000) before any proceeds are distributed to other shareholders in the event of a sale, liquidation, or bankruptcy.

Anti-Dilution Protection:

• Full-ratchet protection to ensure that the investor's ownership percentage is not diluted if shares are issued at a lower valuation in the future.

Protective Provisions:

• Investor approval is required for:
  • Issuing new shares.
  • Raising debt over £100,000.
  • Changing the company’s strategic direction.

4. Employee Stock Option Pool (ESOP):

• The company will set aside 10% of the post-money equity for an employee stock option pool to attract and retain key employees.

5. Other Key Terms

Use of Funds:

• The investment will primarily be used for product development, marketing, and team expansion.

Confidentiality and Exclusivity:

• The investor and company agree to maintain confidentiality during negotiations.
• The company will not seek additional investment offers for 60 days following this term sheet's signing.

6. Legal Binding Nature

• Binding Terms:
  • Confidentiality and Exclusivity are binding.
  • All other terms outlined in this term sheet are non-binding and subject to the negotiation and execution of final agreements, including a Shareholders’ Agreement.

Signed by:

[Investor Name]
Signature: ______________________

[Founder/Representative Name]
Signature: ______________________

Tips for Negotiating Your Term Sheet

Successfully negotiating a term sheet involves careful preparation and strategy:

• Clarify Your Priorities: Know what aspects of the deal are non-negotiable and where you have room for flexibility.
• Understand the Terms: Familiarise yourself with common clauses such as liquidation preferences and anti-dilution provisions.
• Seek Legal Advice: A solicitor experienced in investment deals can help you navigate complex terms and ensure your interests are protected.
• Anticipate Investor Expectations: Be prepared to explain your company’s valuation, growth potential, and how the investment will be utilized.
• Keep Long-Term Goals in Mind: Ensure the terms support your vision for the company, including maintaining sufficient control over key decisions.

The Term Sheet establishes a strong foundation

The term sheet is a pivotal document that lays the groundwork for your partnership with investors. By understanding its components and preparing effectively for negotiations, you can secure a deal that aligns with your company’s growth ambitions while maintaining control and protecting your interests.

Whether you're raising funds for the first time or negotiating with seasoned investors, a well-structured term sheet is key to a successful investment journey.