Part 1: What Is a Term Sheet, Really?
In Part 1 of this 5 Part Series, we explore why a Term Sheet matters more than you think — and how it sets the tone for your fundraising journey.
It starts with a conversation. You may have nailed your pitch, showed traction, and excited the right people. Then the moment arrives — the investor says:
“We’d like to issue you a term sheet.”
You feel the rush. This is real. But what happens next isn’t just a legal formality — it’s the beginning of a long-term relationship, and the term sheet is the first handshake. Polite, professional — and packed with meaning.
Because here’s the thing: term sheets shape your startup’s future. They set expectations, define the power balance, and outline who gets what when things go well… or don’t.
Listen to this article now:
What is a Term Sheet
A term sheet is a non-binding summary of the key commercial terms that will be included in the final investment documents. It’s not the marriage certificate — but it’s the engagement. Once you sign it, you’re emotionally and strategically committed.
Why it matters: You may only get one or two shots to negotiate these terms. Get them wrong, and you’re stuck with them long after the champagne from your funding round has gone flat.
When It Happens (and Why Timing Matters)
The term sheet usually comes after some initial due diligence before lawyers dive in. It’s the moment both parties say:
“We’re serious. Let’s work toward a deal.”
This moment is high leverage for founders. It’s your best window to negotiate — and to shape the long-term dynamic of your investor relationship. Once it’s signed, most terms become very hard to change.
The Three Pillars of a Term Sheet
Every term sheet breaks down into three core areas, each with significant implications for founders.
1. Economics: Who Gets What, and When
This is the financial heart of the deal — the part founders usually focus on first. But there’s more nuance here than just valuation.
Key elements include:
Pre-money and post-money valuation: Determines how much of the company the investor gets in exchange for their money.
Ownership percentage: A direct result of how much you’re raising vs. your valuation.
Liquidation preference: Defines who gets paid first (and how much) if the company is sold. Most commonly:
1x non-participating: Investor gets their money back first but doesn’t double-dip.
Participating preferred: The investor gets their money back plus a share of the remaining proceeds—a less founder-friendly term.
Dividends: Typically not paid in startups, but if included, they can stack up over time.
Anti-dilution protection: Raising a future round at a lower valuation (a down round) protects investors from dilution. However, it can punish founders if it is not structured carefully.
Why it matters: These clauses affect your exit payout, dilution over time, and how aligned your incentives are with your investors.
2. Control: Who Gets to Make the Decisions
Money isn’t the only consideration. Investors often want a say in how the business is run, and this is where control provisions come in.
Key elements include:
Board seats: Who sits on your board and how much influence they have. A typical early-stage structure has one founder, one investor, and one independent.
Voting rights: Not all shares are equal. Preference shares, like voting on major strategic decisions, often come with extra rights.
Protective provisions: Investors can veto key actions such as issuing new shares, selling the company, raising debt, or changing the business model.
Founder vesting: Ensures founders don’t walk away with full equity early. Often includes a 4-year vesting schedule with a 1-year cliff, even if you’re a founder who’s been there from day one.
Leaver provisions: What happens to your equity if you leave the company? “Good leaver vs. bad leaver” definitions matter — a lot.
Why it matters: You might own 60% of your company on paper — but if you can’t make key decisions without approval, you’re not in control.
3. Other Terms: The Fine Print That Isn’t So Fine
This is where founders often get caught off guard. These “miscellaneous” terms can still have a significant impact.
Key elements include:
Exclusivity clauses: Often a 30–60 day period during which you can’t talk to other investors. Make sure you’re comfortable before agreeing.
Warranties and reps: What you’re legally asserting to be true. There’s a trend toward company-only warranties (especially in the UK, per BVCA docs), but read the fine print.
Information rights: How often you must report to investors and what you must disclose.
Fees: Some term sheets ask startups to cover legal or arrangement fees, which can be thousands of pounds/dollars.
ESG / DE&I clauses are becoming increasingly common, particularly among institutional investors. They may include commitments to sustainability, board diversity, or inclusion initiatives.
Why it matters: These terms may seem small, but they affect operations, timelines, costs, and your ability to raise follow-on funding.
What the Data Tells Us
According to the HSBC Innovation Banking 2025 Term Sheet Guide, the current market trends highlight some significant founder-facing shifts:
Over 75% of term sheets were issued at the Seed or Series A level — reinforcing that early-stage capital is still flowing.
Series C+ deals (above £30M) grew from 7% to 11% in volume — signalling a maturing investor appetite for scaling businesses with deeper traction.
Sectors like AI, FinTech, and Life Sciences saw higher term sheet activity, often with more favourable terms for founders due to investor competition
Why Founders Should Care — and Act Strategically
Too many founders treat the term sheet as a milestone to celebrate — not a document to interrogate.
Yes, it’s exciting to get a term sheet. It means someone believes in your vision. But the most innovative founders know this is where the real work begins. The structure of your term sheet will ripple through every future decision you make — who you hire, how you raise your next round, and even how much you take home if you exit.
This isn’t just about what you can negotiate — it’s about knowing what matters most at your stage, your business model, and your long-term vision.
Here’s why founders need to be strategic:
1. Spot Red Flags Early
Some terms can severely restrict your flexibility or tilt the power dynamic unfairly toward investors:
Participating in preferred shares at early stages
Heavy anti-dilution protections
Unfavorable leaver clauses
Investor vetoes on operational decisions
Knowing what’s standard vs. what’s aggressive can help you protect your company from being cornered—either now or in future rounds.
2. Ask Smarter Questions
The goal of negotiation isn’t to win every point — it’s to understand the trade-offs.
When you understand the mechanics of a term sheet, you can:
Identify where there’s wiggle room;
Push back with confidence (“Can we revisit this liquidation preference structure?”); and
Signal to investors that you’re a savvy, long-term partner — not just a founder chasing a cheque.
Being informed also shifts the tone of negotiation from adversarial to collaborative.
3. Protect Your Upside and Control
Most founders don’t lose their company in a hostile takeover. They lose it term by term, often without realising it.
A slightly lower valuation now could be better than a high one with aggressive preferences.
Giving up too many board seats too early can leave you without a voice.
Vesting clauses and leaver provisions determine whether you keep your equity if something goes wrong.
These aren’t just legal terms. They’re economic levers and control mechanisms — and understanding them means keeping more of what you’ve built.
4. Build Trust by Speaking the Language
Investors want to back founders who understand the game they’re playing. When you walk into a term sheet conversation and, for example, you:
Know what a 1x non-participating preference means;
Understand pre- vs post-money implications; and
Ask the right questions about control and governance.
…it’s not just impressive — it’s reassuring. It shows you’re serious, have done your homework, and won’t implode when things get tough.
Fluency builds trust. And trust gets deals done.
You Only Get One Shot at Your First Great Term Sheet
The reality? Your first term sheet often sets the tone for every round after. Future investors will look at it. Some terms carry over. Some can’t be unwound.
Don’t rush to sign. Please don’t assume it’s non-negotiable. And don’t be afraid to say:
“Let me take some time to review this properly.”
Because while funding may feel urgent, owning your company’s future is priceless.
Next Up:
Part 2: Valuations & Preferences — Show Me the Money
We’ll explain how pre- and post-money valuations work, what liquidation preferences mean in plain English, and why some sectors (like AI) see radically founder-friendly terms.
#StartupFunding #TermSheets #Founders #VC101 #SeedStage #SeriesA #StartupAdvice #VCLandscape #StartUpGrowthHacking