A Founder’s Guide to Negotiating a Venture Capital Term Sheet in the UK

When a venture capital (VC) fund makes an investment offer, the first formal document you will usually receive is a term sheet. This is not legally binding in most respects but sets out the key commercial and legal terms of the proposed investment. Understanding and negotiating the term sheet is a vital step for any startup founder, as it establishes the framework for the definitive investment documents that follow.

In the UK, most VC term sheets are based on the British Private Equity & Venture Capital Association (BVCA) Summary of Terms. This model offers a standardised structure that reflects typical market practice, providing transparency for both founders and investors. While it is designed to balance interests, there remain several areas where founders can and should negotiate to ensure the terms are fair and aligned with the company’s growth trajectory.

What a Typical UK Term Sheet Covers

A venture capital term sheet will usually address the following:

• Investment structure – the amount to be invested, the class of shares to be issued (normally preferred shares), and the pre-money valuation.
• Rights attaching to shares – including dividend rights, liquidation preferences, conversion rights, and anti-dilution protections.
• Governance – board composition, observer rights, information rights, and reserved matters requiring investor consent.
• Founder matters – vesting or reverse vesting of shares, restrictive covenants, warranties, and undertakings.
• Exit rights – drag-along and tag-along rights, IPO provisions, and sale procedures.

Each of these sections reflects well-established UK market practice, but there is room for negotiation in many of the details.

Provisions Commonly Negotiated

1. Valuation and Investment Amount

Perhaps the most obvious point of negotiation is the valuation placed on the company. A higher pre-money valuation reduces the equity dilution for founders. Investors may justify a lower valuation based on perceived risks, while founders can push for higher valuations by demonstrating traction, customer growth, or unique IP. The balance is often struck by agreeing on performance milestones that can unlock further investment at improved valuations.

2. Liquidation Preferences

Liquidation preference determines how proceeds from a sale or winding-up are distributed. A typical UK VC term sheet includes a 1x non-participating liquidation preference, meaning investors get back their investment first, but do not double-dip in the upside. Investors may push for multiple preferences or participating rights. Founders should seek to cap these at 1x non-participating, as anything beyond this can significantly reduce their share of future exit proceeds.

3. Anti-Dilution Protection

Anti-dilution clauses protect investors if the company raises future funding at a lower valuation. The BVCA model often provides for a “weighted average” adjustment, which is more balanced. Investors sometimes request a “full ratchet”, which heavily penalises founders by repricing their shares to the new lower valuation. Founders should resist full ratchet protection and negotiate towards weighted average provisions, which remain market standard.

4. Board Composition

Investors typically request a seat on the board and sometimes the right to appoint an observer. Founders should seek to maintain control by ensuring that they and other executives retain a majority of board seats. A balanced compromise is often a board of five, with two founder seats, two investor seats, and one independent agreed by both sides.

5. Founder Vesting and Good/Bad Leaver Provisions

VCs want to ensure founders remain incentivised. This often means subjecting founder shares to vesting over three to four years, with leaver provisions distinguishing between “good” and “bad” leavers. Founders should negotiate for credit for time already served, partial acceleration on exit, and fair definitions of “good leaver” (for example, including resignation due to illness or other reasonable circumstances).

Provisions Rarely Altered (Potential Deal Breakers)

Certain provisions in UK VC term sheets are generally not open to meaningful negotiation, and pushing back too hard can signal inexperience:

• Investor Information Rights – VCs will expect timely access to financial information, management accounts, and budgets.
• Drag-Along Rights – These ensure that if a majority agrees to sell, minority shareholders are required to sell on the same terms. Without this, exits can be blocked.
• Tag-Along Rights – Minority shareholders must be able to sell on the same terms as majority shareholders if a sale occurs.
• Pre-emption Rights – Existing shareholders usually have the right to participate in new share issues to avoid dilution.

These terms are widely seen as fundamental to venture investing. Attempting to alter or remove them will usually be viewed as a red flag by institutional investors.

Typical Issues and Practical Resolutions

• Control vs. Oversight – Founders often fear losing control through board seats and reserved matters. This is usually resolved by limiting reserved matters to genuinely significant decisions, such as changes to share capital or major acquisitions.
• Investor Exit Timelines – Investors typically want exit within five to seven years. Founders should seek flexible drafting so that exit is not forced prematurely, while still committing to a good faith pursuit of a liquidity event.
• Founder Warranties – Term sheets may state that founders will give warranties personally. Founders should push for warranties to be given by the company instead, with founder liability limited to fraud or wilful misconduct.

Final Thoughts

Receiving a VC term sheet is an exciting milestone for any startup, but it also marks the beginning of an intense negotiation process. Founders should recognise which terms are open to discussion and which are fundamental to investors. By understanding market practice, founders can negotiate intelligently, preserve value for the company, and build a constructive relationship with their investors.

Specialist legal advice is essential at this stage. At The Jonathan Lea Network, we regularly advise startups on negotiating VC term sheets, reviewing and drafting investment documents, and ensuring founders are properly protected while securing the funding they need to scale.

How We Can Help

We offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.