What to Expect From Your First Term Sheet

February 17, 2026
Why your first Term Sheet matters

Receiving your first term sheet is an exciting milestone in any fundraising journey. It marks a shift from informal discussions to a commercial indication of commitment from an investor.

Whilst the majority of the term sheet may not necessarily be legally binding, it sets the framework for the investment and the tone of negotiations that follow. Understanding the key legal terms at this stage can make the difference between a smooth investment running to agreed timescales and protracted and costly negotiations at investment documentation stage.  

What is a Term Sheet?

A term sheet is a short-form document that outlines the commercial terms on which an investor is proposing to invest in your company. It typically covers valuation, equity structure, governance provisions and key conditions of the investment.

Are term sheets legally binding?

Although a term sheet is largely subject to the execution of a definitive, legally binding investment agreement, certain terms, such as confidentiality and exclusivity provisions, are intended to be legally binding from the outset and as such, should be reviewed carefully. For example, exclusivity clauses may restrict you from engaging with other potential investors for a defined period.

Before you sign, it’s important to understand the terms that will shape your investment and depict how your business will operate post-investment. Below are some of the key provisions to look out for (without limitation):

Investor Controls and Corporate Governance

An investor will often seek a level of control or oversight to protect their investment. This can take the form of the following:-

  • Board Representation: lead or majority investors will often require a board seat or observer rights during company board meetings. Whilst this can add value depending on the investor’s industry knowledge and experience, founders should ensure that the board remains a manageable size, and that investor consent is not required for routine decisions.  
  • Reserved Matters: these are specific matters which require investor consent, such as issuing new shares, taking on significant debt or altering the company’s articles of association. The goal here from an operational perspective is to balance investor protections with the founder’s ability to run the business day-to-day.
  • Information Rights: investors will typically require access to regular management information, budgets and board reports. Founders should ensure that any reporting obligations are reasonable and proportionate to the company’s operations.

If not carefully negotiated, these corporate governance provisions can grant investors with a disproportionate level of control and oversight over the company, even where they hold a minority shareholding. Founders should therefore consider these provisions in detail and ensure that any investor involvement does not inhibit the business’ day-to-day operations.

Key investor protections you should expect in a term sheet

Another key aspect of any term sheet is the set of legal protections included by an investor to safeguard their investment and future returns.

Key investor protections can include:

  • Pre-emption Rights: these rights provide investors with control over maintaining their percentage shareholding in future funding rounds by giving them the first opportunity to subscribe for shares before they are offered to others (including new third-party investors). This is especially important if further funding rounds are planned, as founders may want to carve out shares issued in a specific round so they do not have to be offered to the existing investors in first instance.  
  • Ratchet Provisions: these provisions can be used to incentivise founders by varying the equity held by management according to the performance of the company after the investment is made (“Performance Ratchets”) or provide investors with an enhanced economic position in the event their shareholding is diluted in a future down round (“Anti-Dilution Ratchet”).
  • Tag-along and Drag-along Rights: tag-along rights allow minority shareholders to sell their shares on the same terms as majority sellers. Conversely, drag-along rights allow majority shareholders to compel minority shareholders to sell, ensuring that a potential buyer can acquire the entire shareholding of the company without obstruction. Founders will want to ensure that the thresholds are reasonable, particularly in respect of the drag-along rights, to prevent the investors forcing a premature or unfavourable sale.
  • Liquidation Preferences: these preferences determine how proceeds are distributed on an exit (e.g. a sale or IPO). Investors typically receive their initial investment, sometimes with a return multiple (i.e. 1x or 2x), before proceeds are distributed to the remaining shareholders. There are two main types of preferences:
    • participating liquidation preferences: where investors receive their original investment back and a percentage of the remaining proceeds after their original investment has been repaid; or
    • non-participating liquidation preferences: where investors receive the higher of their original investment amount or their pro rata share of the remaining proceeds.
  • Founder Warranties: some term sheets will refer to the scope of warranties expected in the investment documentation. This can include warranties made by the company and / or founder regarding the business, financials and legal compliance, either at the investment stage, or on a future exit event. Founders should consider:
    • whether founder warranties should be provided at all or if this can be limited to warranties provided by the company itself; or
    • if founder warranties are required, negotiating caps on liability and ensuring any personal liability is proportionate to the founder’s control and knowledge.
  • Founder Restrictions: these clauses typically prevent the founder from competing with the business or soliciting customers or employees for a defined period post-investment. Whilst these are designed to protect the value of the business, founders should ensure that the restrictions are reasonable in duration and scope so as not to limit any future opportunities.
Next steps after you sign a term sheet

Once a term sheet is agreed and signed, the parties will move into due diligence and drafting of the key investment documentation. This will typically include an investment agreement, shareholders’ agreement and updated articles of association. Most legal and commercial terms will flow directly from the term sheet and so this is the time to negotiate.

How our Corporate team can support your fundraising journey

Whether you are reviewing your first offer or preparing for a competitive funding round, our Corporate team is here to help you navigate every step with confidence. If you would like to understand how we can help, please contact us.

Bethany Goodhew
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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