Investor Term Sheet Review

Investor Term Sheet Review: Legal Advice Before You Sign Investment Terms

An investor term sheet can shape the economics, control and future direction of your business. Although many term sheets are described as non-binding, they often set the commercial framework for the final investment documents and can be difficult to renegotiate once signed.

Our Investor Term Sheet Review service helps founders understand what they are being asked to agree, which terms are market standard, which terms need negotiation and how the proposed investment structure may affect future funding rounds, exits and founder control.

We advise on venture capital, angel, seed and growth investment term sheets, including liquidation preferences, anti-dilution, reserved matters, founder vesting, leaver provisions and exit rights providing clear, commercial advice before you sign.

If you have received a term sheet and are under pressure to sign, send it to us with the deadline and any investor correspondence. We can confirm whether we can review it within your required timeframe and provide an indicative fee estimate.

Why should founders get legal advice on an investment term sheet?

A term sheet is usually the point at which the major economic and control terms of an investment are agreed. Even where parts of it are expressly non-binding, founders can come under commercial pressure to follow the agreed terms when the long-form documents are prepared.

Legal advice at this stage can help you understand:

• what the investor is asking for;
• how the terms affect your ownership and control;
• whether the investment structure is founder-friendly, investor-friendly or broadly balanced;
• which terms may affect future fundraising;
• what should be clarified before signing;
• where negotiation is commercially worthwhile; and
• what the long-form investment documents are likely to include.

Getting advice only after the subscription agreement, shareholders’ agreement and articles have been drafted can be more expensive and less effective. By then, the investor may argue that the key terms have already been agreed.

What does an investor term sheet usually cover?

A venture capital or startup investment term sheet usually sets out the headline terms of the proposed investment. These may include valuation, investment amount, share class, investor rights, board rights, consent matters, founder restrictions and exit provisions.

Common provisions include:

• Valuation and investment amount. The term sheet should identify the pre-money or post-money valuation and the amount being invested. Founders should understand how this affects dilution and whether any convertible notes, ASAs, SAFEs or option pools are included in the valuation calculation.
• Share class and investor rights. Investors may subscribe for preferred shares with rights that differ from ordinary shares. These rights can affect dividends, liquidation proceeds, voting, conversion and control.
• Liquidation preference. This determines how proceeds are distributed on a sale, winding up or other liquidity event. The detail can significantly affect founder and ordinary shareholder returns.
• Anti-dilution protection. This may protect investors if the company later raises money at a lower valuation. The method of adjustment matters, particularly for founders and existing shareholders.
• Reserved matters. These are decisions that require investor consent. They can be reasonable investor protections, but an overly broad list can restrict the company’s ability to operate.
• Founder vesting and leaver provisions. Investors may require founders’ shares to vest over time or be subject to good leaver and bad leaver provisions. These provisions can have major consequences if a founder exits the business.
• Drag and tag rights. These provisions affect what happens on a sale. Drag rights can require shareholders to sell, while tag rights allow minority shareholders to participate in a sale by majority shareholders.

Liquidation preferences in venture capital term sheets

A liquidation preference gives investors priority over other shareholders when proceeds are distributed on an exit or liquidation event. For example, an investor may be entitled to receive their investment back before ordinary shareholders receive proceeds.

The commercial impact depends on the structure. A 1x non-participating liquidation preference is often more founder-friendly than a participating preference, where the investor may receive their preference amount and then also share in the remaining proceeds.

Founders should check:

• whether the preference is participating or non-participating;
• whether it is 1x or a higher multiple;
• whether it applies only on a liquidation or also on a sale;
• whether it ranks equally with or ahead of other investors; and
• how it interacts with future funding rounds.

A liquidation preference may look technical, but it can make a substantial difference to founder outcomes on an exit.

Anti-dilution protection and down round risk

Anti-dilution provisions protect investors if the company later issues shares at a lower valuation than the investor paid. This is often called a down round.

There are different forms of anti-dilution protection. A broad-based weighted average formula is generally less punitive for founders than full ratchet anti-dilution, which can significantly increase investor ownership if a down round occurs.

Founders should consider whether the anti-dilution provision is appropriate for the stage of the company, the valuation risk and the wider economics of the round. It is also important to understand carve-outs for employee share options, convertible instruments, strategic issuances and other permitted share issues.

Reserved matters and investor consent rights

Reserved matters are decisions that the company cannot take without investor consent. They are common in venture capital transactions and can provide legitimate investor protection.

However, founders should carefully review the scope of the reserved matters. If they are too broad or set at low monetary thresholds, they can restrict management flexibility and slow down day-to-day decision-making.

Common reserved matters include:

• issuing new shares;
• changing the articles;
• taking on debt above an agreed threshold;
• selling material assets;
• changing the business plan;
• hiring or dismissing senior staff;
• entering major contracts;
• approving budgets;
• paying dividends;
• starting or settling major litigation; and
• selling the company.

The key question is whether the consent rights protect fundamental investor interests without making the business unnecessarily difficult to run.

Founder vesting and leaver provisions

Founder vesting provisions can require founders to earn their shares over time, even where those shares have already been issued. If a founder leaves before the vesting period ends, some of their shares may be transferred, converted or bought back.

Investors often request founder vesting to ensure that founders remain committed after investment. However, the details are important.

Founders should review:

• how much of their existing shareholding is treated as vested on completion;
• the length of the vesting period;
• what happens if a founder is dismissed or becomes ill;
• the difference between good leaver and bad leaver treatment;
• the price paid for leaver shares;
• whether vested shares are protected; and
• whether the provisions are proportionate given the founder’s historic contribution.

These provisions can have serious personal consequences for founders and should not be treated as boilerplate.

Drag and tag rights in start-up investment documents

Drag and tag rights are common shareholder exit provisions.

A drag-along right allows a required majority of shareholders to force minority shareholders to sell their shares on the same terms as part of a company sale. Investors usually want drag rights to ensure that a minority shareholder cannot block an exit.

A tag-along right allows minority shareholders to join in a sale by majority shareholders. This protects minority shareholders from being left behind if controlling shareholders sell their stake.

The detail matters. Founders should check the approval threshold for a drag, whether investor consent is required, whether drag applies to all types of sale, whether minimum price protections exist and whether warranties or liabilities can be imposed on dragged shareholders.

What parts of a Term Sheet are legally binding?

Many investment term sheets state that the main investment terms are not legally binding, but certain provisions may be binding. These often include confidentiality, exclusivity, costs, governing law and sometimes no-shop obligations.

Exclusivity provisions can be particularly important. They may prevent the company from speaking to other investors for a specified period while the lead investor conducts due diligence and prepares documents.

Before signing, you should understand which parts are binding, how long any exclusivity period lasts, whether either party can walk away and who pays costs if the investment does not complete.

Our Investor Term Sheet Review service

Our Investor Term Sheet Review service is designed to provide founders with practical advice quickly, before they commit to investment terms.

We can help by:

• reviewing the full term sheet;
• explaining the commercial and legal effect of key provisions;
• identifying unusual, aggressive or unclear terms;
• comparing the terms with typical venture capital practice;
• suggesting negotiation points;
• helping you prioritise what really matters;
• preparing comments for investors or their lawyers; and
• advising on likely implications for the long-form investment documents.

We can provide advice in writing, on a call or through a combination of both, depending on the urgency and complexity of the term sheet.

Why choose Jonathan Lea Network for venture capital term sheet advice?

Jonathan Lea Network advises founders, startups, growth companies and investors on investment rounds, shareholder arrangements and commercial contracts. This gives us a practical understanding of how term sheet provisions translate into final legal documents and real-world founder consequences.

We focus on clear advice that helps you make decisions. Rather than simply marking up legal language, we explain the commercial significance of each point, the likely investor rationale and whether a negotiation point is worth raising.

Where the investment proceeds, we can also assist with the subscription agreement, shareholders’ agreement, articles of association, disclosure process, Companies House filings and completion documents.

Fixed-fee term sheet review options

We can often provide a fixed-fee term sheet review once we have seen the document and understand the timing. The fee will depend on the length and complexity of the term sheet, the investment structure, whether there are existing investors and whether you need written comments, a call or negotiation support.

A focused review may include:

• review of the term sheet;
• written comments on key issues;
• a call to discuss the commercial implications;
• suggested negotiation points; and
• a separate fee estimate for support with the investment documents if the round proceeds.

If the term sheet is urgent, we will tell you whether we can assist within your required timeframe before starting work.

Contact Us

We will respond to most enquiries with both an indicative scope of work and fee estimate, as well as the offer of a complimentary 20-minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.

In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 to £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified).

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. We first need an overview of the background and your issues, together with any significant documents, to provide an indicative scope of work and fee estimate.