Signing a term sheet is the first big step in your journey with a VC. Think of it as a handshake in writing—showing mutual interest and setting the groundwork for your partnership. If you're a first-time founder, the legal and financial terms might feel overwhelming, but understanding this document is crucial. It defines key terms, provisions, and their implications, shaping the foundation of your deal.

In this series, we’ll break down a term sheet – giving you clarity on what each term means so you can navigate the early stages of the investment process with confidence.

Link to our sample term sheet here: bit.ly/3D5OrDZ

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understanding valuation

"Post Money Valuation of [·]"

The valuation section concerns what an investor believes the company is worth. Valuation issues addressed in the term sheet will include: pre-money valuation, post-money valuation, capitalization table and price per share.

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pre-emptive rights

"The Investor shall, in any subsequent offering of securities by the Company, have a right to maintain their shareholding in the Company."

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liquidation preference

"Higher of 1x or pro rata entitlement on an as-if converted basis in any liquidity event. Liquidity event shall be defined in the definitive documents and will inter alia include change in control or sale of substantially all of the assets of the Company."

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exit provisions

"The Company and the Founders shall complete an initial public offering or a ‘strategic sale’ within 5 years from the Closing Date (“Exit Date”) on terms that are acceptable to the Investor. The failure of Company and Founders to provide an exit by the Exit Date shall not relieve the Company/Founders of their obligations to provide an exit to the Investor, which shall continue until the Investor ceases to hold any shares. In case of failure to provide exit, the Investor shall inter-alia have a drag along right on all other shareholders of the Company."

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ESOPs

"Unallocated ESOP Pool of [·]% in the post-closing cap table."

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anti-dilution rights

"The Investor shall be entitled to broad based weighted average anti-dilution protection in any down round."

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tag-along rights

"Pro rata tag along right other than in case of change in control or the Founders transferring more than 50% of their shareholding – in which case the tag becomes a full tag."

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transfer of shares

Investor Shares
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"The shares held by the Investor shall be freely transferable to any person with any or all rights in the Company at its sole discretion, except for transfer before the Exit Date (as defined below) to a named list of no more than [•] competitors which can only be made with the consent of the Founders.

Any restrictions on transfer of securities by the Investor shall fall away upon occurrence of an event of default and expiry of the Exit Date."

‍Reverse Vesting

"The shares owned by the Founders shall be treated as ‘Restricted Shares’ on the closing date. 25% of the Restricted Shares shall become ‘Released Shares’ on the first anniversary of the closing date, and the remaining Restricted Shares shall become Released Shares on a monthly vesting schedule over the subsequent 3 years subject to such terms and conditions as will be set forth in the definitive documents."

‍Right of First Refusal

"If the Founders or any other shareholders (with the Investor’s consent) propose to transfer any securities of the Company, the Investor shall have the right to purchase such shares by matching the terms of any such offer."