Term Sheet: how to negotiate key clauses
Valuation, liquidation preference, anti-dilution, vesting, board seats: the 8 term sheet clauses to negotiate and our position per clause.
Co-founder and CFO
To prepare data and financial scenarios for your operation, consult our fundraising support. The clauses and legal decisions should be examined with your advice.
The term sheet is the most important document of your fundraising. It is the investors' letter of intent which defines the conditions of their entry into the capital. A poorly negotiated clause could cost you millions of dollars or control of your business.
To follow the capitalization scenarios, prepare the tests proposed in the sheets Carta and Equify, then have the instruments and rules validated by your advisors.
Clause 1 — Valuation (Pre-money / Post-money)
Pre-money valuation is the value of your business before the capital injection. Post-money = pre-money + amount raised.
Our location : always trade in pre-money. Investors prefer post-money because it artificially inflates the valuation. Example: €10M pre-money + €2M raised = €12M post-money. If you say “€12M valuation”, the investor understands post-money — and your dilution is greater.
Clause 2 — Liquidation Preference
Defines who gets paid first when exiting. A 1x non-participating is the standard. A 1x participating (double dip) should absolutely be avoided.
Our location : 1x non-participating maximum. Never participating. Beyond 1x (2x, 3x), it's a red flag.
Clause 3 — Anti-dilution
Protects investors in the event of a drop in valuation during a future raising. Full ratchet is catastrophic for the founders. The weighted average is the standard.
Our location : weighted average only. Full ratchet = non-negotiable.
Clause 4 — Board Seats
Composition of the board. Investors generally request 1 seat for a Series A.
Our location : 1 investor seat for Series A acceptable. Keep the majority (3 seats: 2 founders + 1 investor).
Clause 5 — Drag-along / Tag-along
Drag-along forces the minority to sell if the majority sell. The tag-along allows minorities to participate in the sale.
Our location : drag-along to 75-80% of voting rights (no less). Systematic tag-along to protect founders.
Clause 6 — Vesting of founders
Investors often impose a 4-year vesting with a 1-year cliff.
Our location : 4 years with 1 year cliff is the market standard — acceptable. On the other hand, shares already held before the exercise should not be subject to new vesting.
Clause 7 — No Shop
Period during which you cannot trade with other investors. Standard: 30-45 days.
Our location : 30 days maximum.
Clause 8 — Pro-rata Rights
Right of investors to participate in future raisings to maintain their percentage.
Our location : acceptable standard pro-rata. Limit them to the next round only (super pro-rata = negotiate with caution).
Our advice : never negotiate a term sheet alone. Have it proofread by a venture capital lawyer AND by a CFO who has already negotiated term sheets. Contact our team to prepare your lifting.
Before negotiating the clauses, make the assumptions of the model and the data room documents reliable. Our support in financial preparation for fundraising allows you to organize this work with your team and your advice.
