UK term sheet explained: clauses founders should read first

What a term sheet is

A term sheet is a short document that sets out the main terms of an investment. LegalVision describes it as short and usually non-binding, which means the parties are not yet committed to complete the deal. It sits between the first agreement in principle and the long-form legal documents.

Its value is that it fixes the commercial deal before lawyers start billing. Everything in the later documents tends to follow it, so changing a point after signature is hard. Read it as the real negotiation, even though most of it is not legally binding.

This is general information, not legal or tax advice.

Ask for the term sheet in writing, even if the investor first describes the deal on a call. A written document lets you compare offers from different investors line by line, and it gives your lawyer something to mark up.

The parts that do bind you

LegalVision lists four clauses that usually carry legal weight: confidentiality, exclusivity (often called a no-shop), who pays the costs, and governing law, which in the UK is usually England and Wales.

Exclusivity is the one to watch. It stops you speaking to other investors for a set period. Check the length, and check what happens if the investor goes quiet. I'd ask for a short window, with a clear right to walk away if the investor changes the terms.

Valuation, share price and the option pool

The headline is the pre-money valuation and the amount invested. LegalVision gives a simple example: a company valued at £2 million before investment, with £500,000 invested, leaves the investor holding 20%. Always confirm whether a figure is pre-money or post-money.

Look for an option pool clause. Investors often ask you to set aside shares for future hires before they invest, which means the pool dilutes the existing shareholders while the new investor keeps a clean percentage. Ask how big the pool is, and ask what hiring plan it is based on. A pool sized to a real plan is easier to defend than a round number.

Ask for the capitalisation table the investor used, so you can check that their percentage matches your own arithmetic. Small differences in how convertibles and options are counted can move the numbers by more than you expect.

Liquidation preference

A liquidation preference gives the investor priority repayment before other shareholders if the company is sold or closes. The common forms are a simple 1x preference, where the investor gets their money back first, and participating preferences, where they also share in the rest.

For an early round, I'd push for a simple, non-participating preference or none at all. A preference that sounds small can take a large share of an exit that is smaller than you hoped. Model a modest sale price against the clause before you agree.

Ask the investor to show you a worked example at a few exit prices. If they cannot, that tells you something about how carefully the clause was thought through. A clear example also helps you explain the clause to your co-founders and existing shareholders.

Anti-dilution, board seats and control

Anti-dilution provisions protect the investor if you later raise at a lower price, usually by adjusting the price at which their shares convert. Ask which type is proposed. Broad-based weighted average protection is milder for founders than full ratchet protection, which resets the investor's price to the new lower price.

Board representation is another standard term. Investors often want a seat or an observer. LegalVision says founders should be cautious about giving up too much control, and I agree. Check the size of the board, who has the casting vote, and which decisions need investor consent, such as new share issues, a sale or a change to the budget.

Reserved matters deserve a careful read, because they are where control sits. Ask for the list in writing and check that day-to-day decisions stay with the board you control.

Founder terms: vesting, drag and tag

Investors often ask founders to accept vesting, so that your shares are earned over time. Ask for credit for the time you have already put in, and ask what happens to unvested shares if you are removed without cause.

Drag-along lets a majority force all shareholders to join a sale. Tag-along lets minority shareholders join a sale on the same terms. Both are normal. Check the threshold for a drag, and check that you cannot be dragged into a sale at a price that leaves founders with nothing.

Think about leaver terms as well. A good leaver clause treats a founder who leaves after four years differently from one who leaves after four months. Agree the definitions of good leaver and bad leaver in advance, because they are hard to negotiate when someone is already leaving.

Where the BVCA model documents fit

UK Private Capital, formerly the BVCA, publishes model documents for early-stage investments, with a Summary of Terms, Model Articles, a Subscription Agreement and a Shareholders' Agreement. The current edition is dated February 2025. It says the documents are drafted for a Series A round with significant fund investment, and are not appropriate for a seed round.

For a pre-seed or seed round you will often see shorter documents. Even so, the model set is useful as a reference for what market-standard terms look like. Ask your lawyer where a proposed clause departs from it.

Shares, classes and what the law gives you by default

GOV.UK explains that companies can issue different classes of shares, and that shareholders get different rights depending on the class. Ordinary shares usually carry one vote per share and a right to dividends. Investors in a priced round often take a preferred class with extra rights written into the articles.

Check that each right in the term sheet turns up in the articles and shareholders' agreement in the same form. If a protection appears in one document and is missing from the other, ask why before closing.

How I'd handle the process

Get a lawyer who does startup deals before you sign, even for a non-binding sheet. Ask for a markup that shows each change from the investor's first draft, and keep a list of the points you have traded. Check the tax position too. If your investors expect SEIS or EIS relief, say so in the term sheet and check the structure with HMRC advance assurance.

Your negotiating position is strongest when more than one investor is interested. That is the reason we built InvestorUniverse around a ranked list of best-fit investors, so you can speak to several in the same few weeks and compare terms side by side.