If an investor has handed you a term sheet, that’s a real milestone – it means they’re serious. But before you do anything else, you need to understand exactly what you’re agreeing to, because the terms you accept now will shape your relationship with that investor for years.

Term sheets are dense. They’re full of defined terms and clauses that interact in ways that aren’t always obvious on first read. This guide breaks down the key sections, explains what to watch for in a UK context and gives you a framework for negotiating terms that actually work for your business.

What Is a Term Sheet?

A term sheet is a non-binding document that outlines the proposed terms of an investment. Think of it as the agreed framework that sits behind the final, legally binding agreements – the shareholders’ agreement, subscription agreement and articles of association – that come later.

Because it’s non-binding, some founders treat it as a formality. That’s a mistake. The term sheet sets the tone for everything that follows, and most of what you agree at this stage will end up in the legal documents largely unchanged.

Key Clauses to Understand

Valuation is often where negotiations start. Make sure you’re clear on whether the figure quoted is pre-money (before investment) or post-money (after investment) – the difference directly affects how much equity you’re giving away. Watch how a newly created option pool is factored in here too. It’s often added to the pre-money valuation, which dilutes founders before the investor puts in a single pound.

Equity and investment amount go hand in hand. The investment amount tells you how much capital you’re receiving; the equity section tells you the percentage of the company the investor will hold as a result.

Liquidation preference determines how proceeds are distributed if the company is sold or wound up. A standard 1x non-participating preference – the UK market norm at seed stage – means the investor gets their money back before other shareholders. A participating preference means they get their money back and then continue sharing in remaining proceeds alongside you. The difference is significant and worth negotiating carefully.

Board composition sets out how many seats the investor takes and what reserved matters they’ll hold. Reserved matters are decisions that require investor approval, and they can cover everything from hiring senior staff to taking on new debt. Understand exactly what operational control you’re handing over before you agree to it.

Voting rights determine the investor’s say in major decisions – future funding rounds, mergers, changes to the articles. These interact closely with board composition and reserved matters, so read them together rather than in isolation.

Founder vesting is standard practice and broadly reasonable – investors want to know you’re committed for the long term. What matters is the vesting schedule and cliff period (typically four years with a one-year cliff) and what happens to unvested shares if you leave the business.

UK-Specific Terms Worth Knowing

In the UK, a few instruments and structures come up repeatedly in early-stage deals.

Convertible Loan Notes (CLNs) are debt instruments that carry interest and have a maturity date, converting into equity at a future funding round. They’re widely used for bridge rounds and early raises where valuation is difficult to agree. Unlike SAFEs – which are more common in the US – CLNs are structured as debt, which has implications for how they sit on your balance sheet and how they interact with SEIS and EIS.

Advanced Subscription Agreements (ASAs) are an alternative to CLNs that allow investors to pay now and receive shares later, typically once SEIS or EIS advance assurance is confirmed. They’re simpler than CLNs and increasingly standard for pre-seed rounds in the UK.

SEIS and EIS eligibility can affect how your term sheet is structured. Certain clauses – particularly around liquidation preferences – can inadvertently disqualify an investment from SEIS or EIS relief. If your investors are relying on those reliefs, flag this with your advisors before negotiations begin.

Cap table is the live record of who owns what in the business, updated after every funding round. Investors will scrutinise it closely during due diligence, so keep it clean and accurate from day one.

How to Negotiate

Come in knowing your priorities. Are you protecting voting control, minimising dilution or preserving flexibility for future rounds? It’s difficult to hold the line on everything, so understand your non-negotiables before the conversation starts.

Valuation matters, but it’s not the whole story. A high headline valuation paired with aggressive liquidation preferences, a large option pool carve-out and broad reserved matters can leave you materially worse off than a more modest valuation with cleaner terms. Look at the full picture.

Get a lawyer involved – one who works specifically with early-stage UK companies. The interaction between liquidation preferences, anti-dilution provisions and SEIS/EIS compliance alone can catch founders out. A good lawyer will often pay for themselves in the terms they help you push back on.

Red Flags to Watch For

Be cautious of liquidation preferences above 1x non-participating. Participating preferences – where the investor gets their money back and then shares in remaining proceeds – are uncommon at seed stage in the UK market and almost always unfavourable to founders.

Watch for broad reserved matters that extend beyond structural decisions into day-to-day operations. If an investor needs to approve routine commercial decisions, that’s not a governance mechanism – it’s a control mechanism.

Full ratchet anti-dilution provisions are a red flag at any stage. These protect the investor’s ownership percentage in full if you raise at a lower valuation in a future round, shifting the entire cost of a down round onto founders and other shareholders. Push for broad-based weighted average anti-dilution instead – it’s the UK market standard for a reason.

If an investor is unwilling to negotiate on any of these points, that tells you something about the kind of partner they’ll be once the deal is signed.