14 Feb 2023

Term sheets present a high-level summary of the precise terms and conditions that will be detailed in the longform legal documents at an investment round.

Although term sheets are largely speaking not legally binding documents (even once signed and dated), it’s generally very difficult to deviate from the agreed terms listed in them, which is why it’s always a good idea to have them sense checked by an investment lawyer before you sign.

For example, perhaps you agreed in the term sheet to give an investor a seat on your board, but in the course of negotiating the longform documents, for some reason or another you changed your mind. It will be very difficult to convince that investor that they are not entitled to that board seat because the investor proceeded on the understanding that they’d have all the rights listed in the signed term sheet.

Term sheet templates

Most deals we see follow similar principles, so we know what points founders will realistically be able to negotiate and which points will be “market standard”. That allows the use of templates, which helps when comparing term sheetswhich is a position you’ll hope to find yourself in because you‘ll have multiple investors seeking investment in your company! The British Venture Capital Association (BCVA) has a set of model documents that broadly cover the most commonly used terms. 

What influences terms

The best deal you get on any term sheet, with any investor, will be influenced less by how much they are interested in your company, and more by how much competition there is.

We’re currently seeing many overseas investors investing in UK technology, chiefly for the diverse and ground-breaking innovation that is being generated but also because the current position of the pound creates exceptional value for money. This is accelerating competition between investors, which often allows UK tech founders the opportunity to negotiate better deals.

Some key terms founders should consider

  • It’s important you’re agreed on your company’s valuation, to ensure you don’t give away too much equity in your company. That demands careful consideration of how much money you’re raising.
  • What will you need that money for? How long will it last you? What milestones are you trying to achieve? Essentially, you want to raise enough money to avoid needing another funding round in a short space of time, but you also want to avoid raising too much money and end up giving away too big a piece of your pie. It’s a fine balancing act. Be sure to make an informed decision before you sign the term sheet and bear in mind that the investor offering the most money does not necessarily mean they’re offering the best deal.
  • Founder restrictive covenants. These usually apply for the entire period founders are engaged by the Company and then up to one or two years after they leave. They’re designed to protect the company and prevent you from leaving to join a competitor or stealing any of the company’s customers, employees or key suppliers. It’s worth checking the terms are not unduly restrictive.
  • Board control. Investors often want a fund manager or representative on your board, to have their say in key business decisions. What experience and value will they add to the company and how will that affect the composition of your board? Will they be responsive and co-operative, or might they be obstructive and disruptive? Is there likely to be a good personality fit?
  • Finding a good match. Check as early as possible during the term sheet stage that an investor is aligned with your principles, objectives, culture and requirements. Beyond the honeymoon period, you want an open and constructive relationship.

Taking advice

Finally, we strongly recommend you take legal and tax advice before signing. Not just to check for major legal or tax issues, but to help plan practicalities and avoid unnecessary pitfalls that we often see only once it’s too late to rectify.

Clients with a tight legal budget often want to avoid legal expenses at this stage, but seeking lawyers’ advice on the term sheet before you sign can help avoid delays and disruption later down the line and therefore save on costs.

For practical, proven advice on your term sheets, reach out to our Emerging Companies team.