If you are raising capital and bringing on an investor, you will likely be negotiating more than just the amount of capital. The term sheet will be a key document that sets out the agreed terms of the proposed deal. The term sheet is non-binding — parties incorporate the terms into a subscription agreement at a later date at which point, they are enforceable against the investor and founder. A term sheet is central to negotiations and provides parties with a focal point to progress the deal.

Who Provides the Term Sheet?

There are certain circumstances where a startup will provide a term sheet to investors (generally an early stage friends and family or seed round). But when an investor decides to invest in your startup, they will generally provide you with a term sheet.

Startup founders will want to retain as much equity in, and control over, the company as possible. Some questions to ask when deciding how much equity you are willing to exchange for investment include:

  • What is the company valued at before the investor invests (pre-money valuation)?
  • How much money do you need to raise to meet your next big target?
  • Is the investor contributing more than just money? For instance, will they bring business acumen, connections and valuable experience?
  • Are you likely to raise more money in the future (which would dilute your shareholding even more)?

What are the Key Terms in a Term Sheet?

Key Term Description
Investment and Valuation How much is the investor investing (maximum and minimum)? Can you raise more from other investors? What will be the pre-money valuation for the round?
Liquidation Preference

When investors invest in a company, they are issued with a class of share — either an ordinary share or preference share. Preference shares have liquidation rights attached.

This means if a liquidation event occurs, such as you selling the company, the preference shareholder is entitled to its investment back before the ordinary shareholders receive anything. This is riskier for founders as they are likely to have ordinary shares.

First Right of Refusal

A first right of refusal clause gives existing shareholders (including investors) the first right to buy any shares from other shareholders selling in the future.

Typically, the company will offer the new shares to all existing shareholders proportionate to their current shareholding.

ESOP Will you be setting up an employee share plan? How will the ESOP affect the pre-money valuation (i.e. is the valuation the VC offering inclusive or exclusive of the ESOP)?
Vesting Will the founders’ shares vest? Standard procedure on a Series A round is four year vesting with a one-year cliff. What this means is if a founder leaves the startup before the first year, none of his or her shares will have vested. 25% of the founder’s shares will then vest at the one year anniversary, and the remaining 75% will vest over the next three years, generally on a monthly schedule. If a shareholder leaves the company within the first year, they must offer all of their shareholders for sale either to other shareholders or back to the company.
Anti-Dilution Rights

What anti-dilution rights will you offer investors (if any)? If possible, you want to avoid offering anti-dilution rights to investors so that all shareholders are diluted (pro rata) when the company issues additional shares.

Early stage VC investors will generally require broad-based weighted average anti-dilution rights. This means that if the startup issues shares at a lower share price than the share price the VC pays in the future, the VC will receive additional shares reflecting an adjusted share price (of all their preference shares). The adjusted share price will be calculated by the average of the price they paid and the lower price paid by the later investors.

Board/Control Will the investor/s have a board seat? What control will the investor/s have over decision making?
Drag-Along A drag-along clause will provide that shareholders owning a certain percentage of shares in the company can ‘drag along’ the minority shareholders if they want to sell the entire company. For instance, a company receives a take-over bid and shareholders with 75% of the shares in the company favour selling. The remaining shareholders (owning 25% of the shares) may be forced to sell the shares on the same terms so the sale can go through.



A term sheet is an important legal document for startups and investors. If you have received a term sheet and need assistance understanding how the terms will affect your startup and founding team, get in touch with our startup lawyers. Fill out the form on this page or call us on 1300 544 755.

If you are building your startup, download LegalVision’s Startup Manual. The free 60-page manual featuring 10 case studies from Australia’s leading VCs and startups.


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