26 February 2026
4 min read
#Corporate & Commercial Law, #Mergers and Acquisitions, #Finance
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You have successfully attracted a venture capital investor and after months of intense scrutiny of your product, company, financials and business plan, a term sheet arrives. What happens next?
With VC transactions, a term sheet is typically a non-binding document that sets out the essential commercial terms between the VC investor and target company prior to preparation of binding transaction documents that formally establish the investment relationship.
For many founders and early-stage companies, aligning the business operationally and strategically with a prospective investor is a fundamental step. Negotiating the investment terms, and particularly the term sheet under which the VC will invest, is a critical and strategic dance off.
On the one hand, founders are keen to secure funding quickly so that the business can proceed with its growth plan. On the other, it is important for the company to present itself as a sophisticated and commercially strong business partner. The primary objective is therefore to identify deal-critical issues and focus on the provisions in the term sheet that are genuinely material to both VC and the target company.
With lawyers now involved, the target company may feel overwhelmed by the terminology and mechanics of these provisions, and use of expressions such as “market standard”. As due diligence and binding investment agreements follow, it is crucial not to lose sight of what is truly important for you as a VC target.
Maintaining a clear focus on what is worth negotiating will help the VC deal and fundraising process move forward more smoothly, and even enhance a burgeoning business relationship with the right VC partner.
Giving away your company, feeling diluted and lacking the initial enthusiasm is not the intention of a VC. Finding the right valuation, with the right VC investor fit is the biggest point of discussion and one that needs careful consideration. Taking a higher company valuation from a bad investor is not always the smartest play.
Typically a VC will want a say over:
These are key clauses for a VC in order to protect against the company issuing shares at a later date and at a discounted price to what the VC has paid. Typically, you might see a clause such as:
“The conversion price of the Series A Shares will be subject to adjustment in the event that the Company issues additional equity securities or securities convertible into equity securities at a price lower than the then applicable conversion price (other than certain customarily excluded issuances ("Excluded Issuances")), including but not limited to options granted under the Share Option Plan”.
It is usual and customary for VCs to insist on such a clause. It is often the case that conceding on inclusion of this type of clause can be used to successfully negotiate on other significant provisions, including price.
This is a fundamental provision in the term sheet from a commercial perspective. It is often one that does not receive enough attention as the focus is on the funds coming in, not a future sale of the company. The clause usually defines what the founding shareholders’ return will look like when the company eventually goes up for sale or Initial Public Offering (IPO). Here, a VC will typically insist on the occurrence of a company sale (or similar event), that its shareholding receive the proceeds of sale in preference to other shareholders. Sometimes as a 100 per cent return on the share price paid by the VC, and other times at a lesser percentage of the investment value, all before the founders might see any payment. It is also important for founders to consider that a Series A liquidation preference share might be tolerable commercially, but if such a provision is replicated in future funding rounds, its effect on founder returns on sale can be significant.
Invariably a VC will insist on having access to the books and records of the company, and to negotiate and finalise the deal on an exclusive basis. Again, this is usual and customary given the VC will be paying lawyers and applying resources to the investment in readiness for the share issue completing and investment funds flowing.
While term sheets are generally non-binding, certain aspects will be legally enforceable. Confidentiality and exclusivity are normally agreed on a legally binding nature. The term sheet does, however, provide the strategic direction and blueprint for what is to be contained in the more detailed investment agreements that will bind the parties. Very often, term sheets are described as ‘market standard’. While there is an element of truth to that statement, often term sheet provisions will vary with confidence levels in the founders, industry awareness, the economic environment and investor preferences.
It is important that founders and companies be careful as to ‘what’s next’ and be mindful and identify what the VC is really looking to guard – its financial investment in you and the business.
If you have any questions regarding venture capital transactions or term sheets, please contact us here.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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