Valuation and preference clauses in term sheets
- Pre-money valuation and investment amount
- Share class (preferred shares with defined rights)
- Liquidation preference (commonly 1x non-participating in Europe)
- Anti-dilution protection (commonly broad-based weighted average)
- Option pool size and whether it is created pre- or post-money
Pre-money versus post-money option pool treatment is one of the most consequential negotiation points. A pool created pre-money dilutes existing shareholders before the new investor's stake is calculated, effectively lowering the real valuation founders receive for their shares. See series a for the mechanics.
Board composition and investor veto rights
| Clause | What it does |
|---|---|
| Board composition | Sets how many seats founders, investors, and independents hold |
| Protective provisions | List of actions requiring investor consent, such as new share issuances or a sale |
| Drag-along | Lets a qualifying majority force all shareholders to sell in an acquisition |
| Tag-along | Lets minority shareholders join a sale on the same terms as a selling majority |
| Pro rata rights | Lets the investor invest in future rounds to maintain their percentage |
| Information rights | Requires the company to share regular financial and operational updates |
Confidentiality and exclusivity in term sheets
Most of a term sheet is explicitly non-binding and subject to due diligence and final legal documentation. However, certain clauses are typically binding immediately: confidentiality, exclusivity (also called a no-shop clause, which prevents the company from soliciting other offers for a set period), and governing law. Everything else waits for the definitive documents, which is also where the ownership after funding is finally locked in.
An exclusivity period, often 30 to 60 days, can leave a founder unable to negotiate with other investors even if the deal later falls through, so it should not be signed lightly.
Focusing on control and downside protection
Focus first on the terms that affect control and downside outcomes rather than only the headline valuation. A high valuation paired with a participating liquidation preference and full-ratchet anti-dilution can leave founders worse off than a lower valuation with clean, founder-friendly terms.
Term sheet clauses people ask about
- Is a term sheet legally binding?
- Most economic and governance terms are not binding until definitive agreements are signed, but confidentiality and exclusivity clauses usually are binding immediately.
- What is a no-shop clause?
- A clause preventing the company from seeking or negotiating other investment offers for a set period after signing the term sheet.
- Should founders negotiate a term sheet with a lawyer?
- Yes. Even though it is short, a term sheet sets the framework for the full legal documents, and mistakes here are expensive to fix later.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.