The Term Sheet in the Fundraising Process: a legal guide for startups

What is a term sheet?

Your startup's pitch deck and business plan are ready and up to date? Your investor meeting went well, and you are about to receive a term sheet?

Also known as a letter of intent, the term sheet is one of the first documents signed as part of a fundraising round. It contains a summary of the main legal and financial terms of the investment.

The term sheet formalises the points of agreement between the startup and the investor before the definitive documentation is drafted: investment agreement, shareholders' agreement, updated articles of association, corporate resolutions, and closing documents.

What clauses should it include? What are the legal stakes? How do you avoid signing an unbalanced term sheet too quickly? We help you see things more clearly so you can secure your transaction.

What clauses should a term sheet include?

The purpose of the term sheet is to set out in writing the main terms of the agreement you will potentially enter into with the investor.

It frames the negotiation before committing time, legal fees, and due diligence. In practice, it is often sent by the investor to the startup. That does not mean it should be accepted as is.

Clause block	What it contains	Why it matters
Economics of the deal	Amount invested, valuation, instrument type, percentage of capital.	Determines dilution and future economic rights.
Governance	Reserved matters, veto rights, board seat, reporting.	Determines the investor's level of control.
Liquidity	Drag along, tag along, exit rights, liquidation preference.	Determines the exit conditions for founders and investors.
Investor protection	Anti-dilution, liquidation preference, warranties, conditions precedent.	Can significantly affect the value actually captured by founders.
Process	Confidentiality, exclusivity, timetable, audits, costs.	Governs the negotiation period before closing.

Clauses relating to the investment agreement

The letter of intent sets out the terms of the future investment agreement, namely:

• the identity of the parties;
• the intended investment amount;
• the startup's pre-money valuation;
• the terms of the equity stake, whether in cash or in kind;
• the nature of the securities or instruments used: ordinary shares, preference shares, convertible bonds, BSA AIR, SAFE, or other instruments;
• the conditions precedent to be satisfied before closing;
• the provisional timetable for the transaction.

Valuation is often the most visible point of negotiation. But it should not overshadow everything else. A high valuation with very investor-protective clauses can be less favourable than a more reasonable valuation with balanced documentation.

Clauses relating to the shareholders' agreement

The term sheet must also include the main terms and conditions of the future shareholders' agreement.

It may in particular provide for:

• the list of reserved matters requiring the investor's prior consent or consultation;
• restrictions on the transfer of shares: pre-emption rights, lock-up clause, approval rights;
• financial provisions relating to profit sharing;
• exit clauses governing early exit scenarios for shareholders;
• governance provisions: composition of the board of directors, appointment of the chairman, CEO, or board members;
• information and reporting rights;
• rules applicable in the event of a founder's departure.

For further reading, see our article on the founders' shareholders' agreement.

Obligations of the parties in the context of the fundraising round

The term sheet sets out each party's obligations in the context of the fundraising round. It generally includes clauses covering:

• confidentiality, prohibiting disclosure to third parties of the term sheet's content and the progress of negotiations;
• information, by which the company undertakes to provide the investor with all information useful to the completion of the investment;
• conditions precedent, covering the completion of legal, financial, tax, or technical audits and the obtaining of required regulatory approvals;
• exclusivity, prohibiting or limiting negotiations with other investors for a defined period;
• timetable, organising the various stages through to final signing and closing.

The exclusivity clause deserves particular attention. It can prevent the startup from pursuing discussions with other investors for several weeks, with no guarantee that the transaction will go through.

Is the term sheet binding?

The drafting of the letter of intent is relatively flexible. The parties may therefore draw it up themselves, for example on the basis of a term sheet template. In practice, it will generally be the venture capital investor who sends this document to your startup.

However, it is advisable to have it reviewed or negotiated by lawyers, who will assess the extent to which it is binding.

The value of this document is that it records the points on which you have already reached agreement. You may insert specific clauses, such as a confidentiality clause, and define the points to be negotiated later with the investor.

In principle, the letter of intent is not intended to be fully contractual and may be presented as a non-binding term sheet. It expresses the mutual intention of the parties to complete the fundraising round, without immediately committing to the definitive documentation.

This is possible provided that the non-binding nature is clearly stated in the document. Take care to avoid inserting overly precise completion conditions or commitments worded ambiguously.

Clause	Often binding?	Point of attention
Confidentiality	Yes	Must be respected even if the fundraising does not proceed.
Exclusivity	Yes	Limit the duration and provide an exit if the investor does not progress.
Costs	Often yes	Check who bears the legal, audit, and advisory fees.
Valuation	In principle no, if non-binding	Be careful with overly firm wording.
Closing	No, unless clearly committed	Make completion conditional on definitive documentation and audits.

Clauses to negotiate before signing

Successfully negotiating your term sheet in the fundraising process is essential. This document is part of the investment documentation and often determines the future balance of power between founders and investors.

1. Pre-money and post-money valuation

The pre-money valuation is the value of the company before the investment. The post-money valuation is the value of the company after the investment. This distinction is central to calculating the dilution of founders.

2. Liquidation preference

The liquidation preference entitles certain investors to recoup their investment on a priority basis in the event of a sale, liquidation, or liquidity event. It may be simple or multiple, participating or non-participating.

This clause can profoundly alter the distribution of the sale price between investors and founders.

3. Anti-dilution

The anti-dilution clause protects the investor in the event of a future round completed at a lower valuation. It can be more or less aggressive depending on the formula used.

4. Reserved matters

Reserved matters give the investor a right of prior approval over certain key decisions: share issuances, budget, debt, asset disposals, key hires, strategic pivots, amendments to the articles of association, and acquisitions or disposals of subsidiaries.

These rights must protect the investor without blocking the startup's day-to-day operational management.

5. Founder departure clauses

Good leaver / bad leaver clauses set out what happens if a founder leaves the company. They must be drafted with precision, as they can directly affect founders' shareholdings.

6. Exit clauses

Drag along, tag along, pre-emption rights, approval rights, lock-up: these clauses govern the conditions under which shares may be transferred and the exit conditions for investors.

Common mistakes startups make on a term sheet

Many founders sign a term sheet too quickly because they are focused on the amount raised. That is understandable, but dangerous.

Mistake	Risk	Best practice
Focusing only on valuation	Accepting unfavourable economic clauses.	Analyse all financial and governance rights in full.
Signing an overly long exclusivity period	Blocking the raise with other investors.	Limit the duration and make exclusivity conditional on real process progress.
Failing to check the non-binding nature	Creating unanticipated commitments.	Clarify which clauses are binding and which are not.
Ignoring veto rights	Losing operational agility.	Limit reserved matters to genuinely strategic issues.
Not preparing for due diligence	Delay, renegotiation, or deal collapse.	Prepare the legal data room before or as soon as the term sheet is received.

If you would like support in negotiating your term sheet or have questions after reading this article, it is advisable to have the document reviewed before signing.

FAQ: Term Sheet and Fundraising

Useful articles and resources

To go further on fundraising, governance, and the legal structuring of your startup, see also:

• Fundraising in Francophone Africa: understanding the typologies;
• The founders' shareholders' agreement;
• Protecting your trademark at OAPI;
• Register your trademark with African Legal Factory;
• Have a commercial or tech contract reviewed;
• Set up your company with African Legal Factory;
• Subscribe to the ALF newsletter.