Build your funding strategy. Protect your upside. On your terms.
What You're Getting Into
A term sheet isn't just paperwork—it's the DNA of your relationship with investors. These 5-10 pages will shape every decision you make for years. Get it wrong, and you're stuck. Get it right, and you've built the foundation for sustainable growth.
This isn't legal advice. It's battle-tested insight from operators who've been there. Consult a qualified attorney for your specific situation.
The 17 Terms That Matter
💰 1. Investment Amount
What it is: The cash they're putting in for preferred stock.
VC Perspective: They want meaningful ownership (10-20% in seed) aligned with their fund strategy. More skin in the game means more control.
Your Perspective: You need enough runway for 12-18 months without killing your equity. Too little forces another raise too soon.
Real Impact: A VC invests £1M at £5M pre-money. If you hit milestones, that funds your growth engine. If not, they write off £1M but their ownership could still pay off in acquisition.
📊 2. Pre-Money Valuation
What it is: What your startup is worth before their money comes in.
VC Perspective: Lower is better—maximizes their equity and protects against overvaluation in uncertain seed stages.
Your Perspective: Higher valuation means less dilution and stronger signal to future investors. Undervalue yourself and you're fighting uphill forever.
Real Impact: £6M pre-money with £2M investment = 25% dilution. Drop to £4M pre-money and you're suddenly diluting 33%. That difference compounds through every future round.
🎯 3. Post-Money Valuation
What it is: Pre-money + investment = your new company value.
VC Perspective: Crystal clear ownership calculation. No surprises, no confusion.
Your Perspective: Use this to model your cap table and plan employee options. High post-money looks good but can make Series A harder if growth doesn't match expectations.
Real Impact: £1.5M investment at £4.5M pre-money = £6M post-money, VC owns 25%. Exit at £30M? They get £7.5M (5x return). Your diluted share determines your payout.
🛡️ 4. Type of Security
What it is: Usually Series Seed Preferred Stock in priced rounds.
VC Perspective: Preferred stock = downside protection and priority over common stock. Makes seed investing less risky.
Your Perspective: SAFEs are simpler (no immediate valuation debates), but preferred stock attracts institutional VCs and signals seriousness.
Real Impact: In a £10M acquisition, preferred holders get paid first. Common holders (founders) might get less if the exit is modest.
🔒 5. Liquidation Preference
What it is: Who gets paid first when you exit (typically 1x non-participating for seed).
VC Perspective: Get their money back before anyone else. Critical downside protection in high-failure seed stage.
Your Perspective: Fight for 1x preference max. Multiple preferences kill founder motivation and exit value.
Real Impact: VC invests £2M with 1x preference. £5M sale? They get £2M first, remaining £3M splits among all shareholders. Without preference, they might only get £1M based on ownership.
⚖️ 6. Anti-Dilution Protection
What it is: Adjusts VC share price if future round is at lower valuation.
VC Perspective: Protection against down rounds. Broad-based weighted average is standard—preserves value when market turns.
Your Perspective: Avoid full ratchet (brutal). Weighted average is fair. Heavy protection scares future investors.
Real Impact: VC invests at £10/share. Next round at £5/share triggers adjustment to £7/share (weighted average), giving VC extra shares and diluting founders more.
📈 7. Pro Rata Rights
What it is: VCs can invest in future rounds to maintain ownership percentage.
VC Perspective: Follow their winners. "Super pro-rata" lets them double down on hot startups.
Your Perspective: Builds VC loyalty but can crowd out new investors. Negotiate caps or time limits.
Real Impact: VC owns 15% post-seed. Series A raises £10M? They can invest £1.5M to maintain 15%. Exercised = continued influence. Not exercised = diluted stake.
🏛️ 8. Board Composition
What it is: Who sits on your board (e.g., one VC, one founder, one independent).
VC Perspective: Oversight and strategic input. Small seed boards (3-5 seats) give meaningful influence.
Your Perspective: Maintain control while getting valuable guidance. Wrong board member can paralyze decisions.
Real Impact: 3-member board: CEO, VC rep, mutual independent. Pivot decision? VC vote can make or break your strategy.
🚫 9. Protective Provisions (Veto Rights)
What it is: VC must approve key decisions like issuing new stock or changing bylaws.
VC Perspective: Prevents harmful founder decisions. Enforces fiscal discipline.
Your Perspective: Keep scope narrow to maintain agility. Broad vetoes slow everything down.
Real Impact: You want £500k debt for growth. VC sees risk and vetoes. Forces you to find alternatives or bootstrap.
📋 10. Information Rights
What it is: VCs get access to financials, cap tables, KPIs (quarterly or on demand).
VC Perspective: Monitor performance, spot issues early, report to LPs.
Your Perspective: Limit to "major investors" to reduce admin burden. Transparency builds trust for future support.
Real Impact: Monthly KPI sharing lets VC advise on burn rate, potentially preventing cash crunch through early warning.
🤝 11. Right of First Refusal & Co-Sale
What it is: Existing shareholders can buy shares before outsiders; tag along in founder sales.
VC Perspective: Control cap table, prevent unwanted shareholders, ensure liquidity alignment.
Your Perspective: Carve out small transfers (gifts, family). Limits your personal liquidity options.
Real Impact: You want to sell 5% stake. VCs get first dibs. If they pass, they can proportionally sell their shares in your deal.
🎯 12. Drag-Along Rights
What it is: Forces minority shareholders to join majority-approved sale.
VC Perspective: Clean exits without holdouts. Usually 50-60% threshold.
Your Perspective: High threshold protects against forced low-value sales. Maintain some M&A control.
Real Impact: 60% approve £20M acquisition. Dissenting minorities get "dragged along"—deal closes cleanly.
🎁 13. Option Pool Size
What it is: Equity reserved for future hires (typically 10-20% post-money).
VC Perspective: Ensures talent attraction without diluting VCs further. Often "topped up" before investment.
Your Perspective: Dilutes you upfront but essential for growth. Don't over-reserve.
Real Impact: 15% pool created post-seed. Grant 1% to key engineer—incentivizes without cash but reduces founder equity.
⏰ 14. Founder Vesting
What it is: Your shares vest over time (e.g., 4 years, 1-year cliff). Leave early = company repurchases unvested shares cheaply.
VC Perspective: Ensures commitment, aligns long-term incentives.
Your Perspective: Accept but negotiate credit for past work. Protects against co-founder disputes.
Real Impact: Founder with 40% on 4-year vest leaves after 2 years. Company repurchases 50% of shares, redistributing to remaining team.
🔐 15. Exclusivity (No-Shop)
What it is: Can't solicit other offers during negotiations (30-60 days).
VC Perspective: Prevents bidding wars, secures the deal efficiently.
Your Perspective: Limits options, risks better deals. Keep duration short. Breach kills the investment.
Real Impact: 45-day exclusivity prevents rival pitches. Talks fail? Resume fundraising but lost time shortens runway.
✅ 16. Closing Conditions
What it is: Prerequisites for funding—due diligence, legal compliance, key hires.
VC Perspective: Risk mitigation through verification. Can withdraw if red flags appear.
Your Perspective: Push for minimal conditions to speed close. Delays burn precious cash.
Real Impact: Funding conditional on IP audit. Issues discovered? VC renegotiates or exits, forcing you to fix before closing.
⚖️ 17. Governing Law
What it is: Which jurisdiction's laws apply (Delaware for US startups).
VC Perspective: Investor-friendly laws like Delaware's. Predictable enforcement.
Your Perspective: Local laws might favor you, but VCs typically insist on standards. Consider dispute costs.
Real Impact: Delaware law applies. Breach suit gets resolved in efficient VC-familiar Delaware courts versus slower home state courts.
The Bottom Line
Term sheets aren't just legal documents—they're the operating system of your startup relationship. Every clause shapes your future decisions, exits, and control.
Key Principles:
- Strong traction = negotiation leverage
- Simple terms, close faster
- Align incentives for long-term success
- Preserve enough control to execute
The 2025 market shows more founder-friendly terms due to competition, but don't get comfortable. Each negotiation is unique.
Need legal review? Always consult qualified counsel.
Remember: You're not just raising money. You're choosing partners for the hardest journey of your professional life.
Built by operators, for operators. Because execution beats everything.
