Introduction
A term sheet is a pre-contractual agreement (comparable to a letter of intent) that records the key points of a planned financing round before the legally binding agreements (investment agreement and shareholders’ agreement) are negotiated. It is usually not legally binding, but in practice it is a serious commitment by all parties: departing from terms already agreed is difficult to enforce at a later stage.
Key Takeaways
- A term sheet structures the negotiation, reduces misunderstandings in later, more expensive phases and serves as a blueprint for the final agreements.
- Every term sheet negotiation takes place on three levels: economic rights (return dynamics), control rights (power dynamics) and organisational matters – anyone who looks only at valuation overlooks two thirds of the negotiating space.
- A term sheet has effects beyond the current round: the terms negotiated today often form the basis for negotiating the next financing round.
- Market benchmarks (PwC Venture Capital Market Study) show: liquidation preferences are almost always present, as are ESOPs, voting rights/vetoes, anti-dilution protection and drag-along & tag-along rights.
- Where possible, present the first draft of the term sheet yourself – whoever writes it leads the negotiation.
The Three Core Areas of a Term Sheet
A term sheet can be broken down into three dimensions: economic rights (valuation, investment volume, type of participation, liquidation preferences, anti-dilution protection, founder shares/VSOP/ESOP, warranties, dividends), control rights (board composition, voting rights and consent requirements, key points of the shareholders’ agreement, exit rights such as drag-along/tag-along, pooling agreements, milestones, managing director agreements) and organisational matters (timetable, jurisdiction, confidentiality, contract language, exclusivity, non-compete clauses). This structure helps to keep an overview in negotiations and to avoid overlooking any material point. Founders who actively draft their own term sheet keep more control over the negotiation.
Market Benchmarks from the PwC Study
Depending on the stage of the start-up (early stage, growth stage or late stage), different approaches are taken in the three core areas. In the early stage, for example, valuation is mostly based on experience and the VC method, whereas growth-stage and late-stage companies are more likely to be valued using multiples or a DCF method. Liquidation preferences are practically standard in the early stage, mostly as a simple (non-participating) preference with a 1x multiple. In later stages, this can no longer be taken for granted. Anti-dilution protection is predominantly applied as a weighted average rather than a full ratchet. ESOP pools are an issue in every financing stage, typically with four-year vesting.
Hot Topics for the Negotiation
The following topics determine whether a term sheet is fairly balanced for founders – four of them deserve particular attention:
- Liquidation preference – who gets their money first on exit? Recommendation: a 1x non-participating preference rather than multiple or participating models, which can leave founders empty-handed on exit.
- ESOP – who bears the dilution? What matters is whether the pool is calculated “gross” (pre-money, the full dilution falls on the founders) or “net” (post-money, dilution shared proportionately) – this belongs clearly in the term sheet from the outset.
- Veto rights – overly broad consent requirements that also cover day-to-day operational decisions lead to deadlock; vetoes should be limited to genuinely material decisions and defined precisely.
- Anti-dilution protection – a “full ratchet” mechanism with no time limit can dilute founders massively in a down round; a weighted average with a clear expiry is the more balanced alternative.
In addition, valuation/investment amount as well as drag-along/tag-along clauses also deserve early attention.
Panel
Start-up Lounge Vol. 2 · Session held on 2 July 2025
boost4S: Dr. Ulrich Eisele & Terje Noevig · GLNS: Georg Lindner & Dr. Konrad Hildebrand
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