Investor Deals: What to Look Out for in Term Sheets

Author: Velsa

Your first financing round is coming up - a big milestone for your startup! But before the money flows, you will encounter a document that is crucial for the future of your company: the term sheet.

The term sheet is a non-binding letter of intent that sets out the key economic and legal conditions of financing.

A well-negotiated term sheet ensures clarity, creates trust among investors and prevents surprises during the final contract negotiations. But which points are particularly important - and where should you take a closer look?

What Is a Term Sheet and Why Does It Matter?

The term sheet is a non-binding letter of intent that sets out the key economic and legal conditions of a financing round. It serves as the basis for the financing agreements and therefore influences the long-term relationship between investors and founders.

Important: Even if a term sheet is not legally binding, investors will be reluctant to deviate from the points set out in it. If you are negligent here, you risk difficult renegotiations or unfavorable conditions in the final documents.

The Key Clauses in a Term Sheet

Not all clauses carry the same weight. Some directly affect your control over the company, your future equity, and potential exit options. These are the most critical aspects to watch out for:

1 Valuation & Ownership

• What valuation does the Term Sheet set for your startup?
• How much equity will investors hold after the funding round?

Why is this important?

The amount of the investment together with the shares to be sold determines the valuation of your company (raised amount / dilution = post-money valuation, example: €1.5M/25% = post-money valuation €6M).

The lower the valuation, the more shares go to investors - which reduces your own shareholding (so-called dilution). Make sure you find the right balance early on to raise enough capital without giving up your majority rights early on.

2 Liquidation Preference

• How are future profits or exit proceeds distributed?
• Do investors receive a preferential payout (1x, 2x, …)?

Why is this important?

In an exit scenario, investors are often paid out first. A high liquidation preference can put founders at a disadvantage, as there are hardly any proceeds left for them - even in the event of a successful sale.

3 Founder Vesting & Lock-Up

• How long do you need to "earn" your shares (vesting)?
• What happens if a founder leaves?

Why is this important?

Vesting protects the startup if a founder leaves early. Check exactly how long the vesting period lasts and whether there is a fair regulation for voluntary or involuntary exits.

4 Approval Rights & Governance

• Which decisions can investors block or enforce?
• Which decisions can founders block or enforce?

Why is this important?

You want to remain flexible in your decisions! Governance structures that are too rigid can restrict your entrepreneurial freedom.

5 Downround Protection

• How are investors protected in the event of a future downround?
• What impact does this protection have on your share dilution?

Why is this important?

If your next financing round takes place at a lower valuation than the current one (a so-called downround), investors could demand preferential rights to new shares under downround protection, further diluting you.

Which Points Are Less Critical?

While the points mentioned above are strategically important, some clauses are considered standard market practice and hardly controversial. They occur in almost every investor deal and usually do not affect control or the distribution of shares:

✔ Pre-emption rights & pro rata subscription rights – Investors are allowed to participate in new financing rounds in order to retain their stake. As long as these rights are fairly accessible to all parties involved, they do not pose a problem.

✔ Tag-Along Rights – Protect minority shareholders by allowing them to sell their shares under the same conditions as majority shareholders.

✔ Information Rights – Investors get access to reports and KPIs, which is common practice among professional investors.

✔ IP & Non-Compete Clauses – Protection of intellectual property (IP) & exclusion of competitive activities, which is beneficial for both sides.

Tip: If you are unsure, it is worth talking to experienced founders, mentors or lawyers to strengthen your negotiating position and correctly classify standard market clauses.

How to Strategically Approach Term Sheet Negotiations

These three steps will help you navigate and negotiate your Term Sheet effectively:

1 Understand Your Priorities
What’s more important – a higher valuation or long-term control? The clearer your strategy, the more confidently you can negotiate.

2 Don't Rush into Signing
Investors often push for quick signatures - take the time to check everything carefully. Ideally, of course, you should do this homework before a financing round.

3 Seek Expert Support
Mentors, experienced founders and lawyers will help you to correctly assess critical points. Even the best term sheet can harbor long-term risks if it was negotiated unfavorably.

Final Thoughts: A Strong Term Sheet Sets the Foundation for Success

A well-crafted Term Sheet is more than just a document – it sets the foundation for your collaboration with investors. Being well-prepared allows you to negotiate better terms, retain long-term control, and build a sustainable business.

Tip: If you're wondering which clauses are most important for you or how to negotiate your Term Sheet effectively, seeking expert advice at an early stage can be a game-changer.

On Velsa you will find suitable legal packages with reviewed contract templates and specialized legal experts who can support you with your investor deals.