Round Terms and Term Sheets

A term sheet is the most important document that a founder may ever sign. It governs the key terms of a deal between a startup and its investors. Fortunately term sheets have become a lot more straightforward in past years.

A typical early-stage term sheet will include (some of) the following clauses:

🤝 Commercials
Investment and round size
As specific as possible description of the investment by one or more investors, the target or concrete round size and ideally also the dilution. Try to avoid misunderstandings by making this section as concrete as possible; ideally by attaching a cap table.
The valuation per se describes how valuable an investor perceives your company. Having said that - especially in early stages - the valuation is rather a function of your capital need (derived from your financial plan / budget) and agreed dilution than an actual value you would be able to sell your company for.
Type of security
When founding a company there is usually only one type of shares (called ordinary or common shares). Investors will however always want preferred shares, i.e. with certain preference rights that are superior (or at least equivalent) - in terms of rights - to all existing shares. The shares are therefore often named according their stage, i.e. "Seed Shares", "Series A1 Shares", etc.
Option pool
A good term sheet will also specify the amount of options that have been / will be created prior to / in the course of the round. Again: be as specific as you can in order to avoid commercial misunderstandings. A fair rule of thumb is: all options that have already been granted to employees are not (commercially) carried by (a) new investor(s), while all shares required for future incentives / hires, will be carried by all shareholders (including the new investor(s)).
Liquidation preference
There are many forms of liquidation preferences. The main thing to know is the difference between a participating and non-participating liquidation preference. You can read more about it here. One time (1x) Non-participating liquidation (in German: "anrechenbare") preferences have become the definite market standard, with (multiple times) participating (in German: "nicht anrechenbare") liquidation preferences only being used in crisis times (of markets or a specific company).
Anti-dilution protection
Anti-dilution protections are meant to protect investors against their equity ownership becoming diluted or less valuable by giving the investor the chance to adjust the price that was paid by an investor in retrospective, in case a next financing round takes place at a price below the one of this round. Anti-dilution protections can become very complex, especially when they come into action. Try to include sample calculations in your final documentation.
Board representation
Investors leading a financing round will typically want to sit on your board to be close to the business. These seats are normally taken by the partner / investment manager in charge of the transaction. Often investors will want to have a further "non-voting observer seat" in order to have a colleague support them with their board work. Try to make sure that your board does not get too big too soon (e.g. by tying a seat to a minimum shareholding, time period or similar). Since it is common in the US, it has become more or less market standard in Europe too that the founders of a company also formally sit on the board of their company and often hold the majority or at least a significant number of seats in the earlier stages of a company.
Protective provisions
There will be certain decisions (e.g. sale of shares, starting an exit process, approving a budget for the upcoming year, hiring highly paid employees, etc.) that your investors (often acting as one group and deciding by simple majority amongst the preferred shareholders) will want to approve. You will ideally make sure - with any decision in your company - that no single investor will have a veto right alone.
Drag along
A drag along (with 50% shareholder majority and approval by your investors) makes sure that when you (as long as you hold the shareholder majority) and your investors are willing to sell the company, smaller shareholders cannot block this decision. Again: make sure that no single investor can block this alone.
Information rights
For internal reporting purposes, but also in order to be sufficiently informed, investors will want to receive some information on a monthly / quarterly / yearly basis, like basic financials, liquidity, etc (for more information, go to Investor Reporting).
🦄 Pro-rata and co-sale
Pro-rata right
While in many countries required by law, this is a protection right for investors making sure that they can participate with their according stake in the company in future financing rounds.
Right of first refusal
Rights of first refusal (ROFR) are meant to make sure that the shares of founders, investors, angels, etc. of a company don't sell their shares to anybody stay ideally with the same shareholder base and e.g. are not sold to competitors or other parties you don't want to have on your cap table.
Tag along
Tag along rights protect (small) shareholders from "being left behind" in case other shareholders are selling their shares.
💪 Founders
Founder undertakings
When trusting you with a certain amount of money that is being invested into your company, investors will typically expect some "basic hygiene standards", like non-compete and non solicitation clauses. They will further make sure that all IP that you hold (or employees are holding / held) is transferred to the company.
Founder vesting
Based on our experience, the founder vesting is typically the single most discussed clause in a term sheet. While especially first time founders equate vesting with somebody taking away their shares in a company that they've potentially sacrificed a lot for, it is not. Especially in early stages the valuation of a company is to a major part derived from the team behind it. Without some or all of the founders a company / project may soon be worthless. Therefore investors want to make sure that there is a very clear incentive scheme for the founders to stay with the company. Furthermore, in case a founder decides to leave the company, the only chance to save the company (since an early stage company cannot be run by managers) is to find a replacement, who in turn will need to be incentivized with equity in order to have as much skin in the game as a founder. The latter makes the vesting topic not one that aims to protect investors, but rather all shareholders of a company. Most of the times - especially in early days - vesting schemes typically vest (a) monthly, (b) over a 4-year time period and (c) with a 1-year cliff. Although sometimes hard to digest, vesting schemes are usually extended / renewed with each financing round, however, it is common to not include all - already vested - shares into an adjusted vesting scheme.
Investors of a round will almost always want to receive some guarantees from the founders about the current state of the company. The main rationale for this is to (a) make sure that the founders know the company and disclose any major inconsistencies and (b) avoid due diligence processes that take months.
🧐 Various
Closing conditions and date
Make sure to agree on a concrete timeline as well as outstanding tasks of each side on the way to the closing of your round.
Depending on who is in a stronger position, either the company (i.e. founders and potential existing investors) or the new investor(s) will have the right to create the first draft of the contracts (investment agreement, shareholders agreement, articles of association, etc.). It makes sense to invest into high quality contracts from day one, so you will have a good chance that - even if you don't have the right to create the first draft - the draft of the investor(s) will only be an amendment to your existing contracts. The creation of high quality contracts usually starts at € 20k in early days (Pre-Seed, Seed) and increases to € 40k (Series A) and more in later stages (Series B+).
In most cases, it is common practice that the investor(s) are allowed to subtract a certain amount of their investment for their due diligence costs as well as (if applicable) contract costs.
While it may still take some time until you close the financing round, the signing of a term sheet is the instrument you fix 80% or more of the round specifics. If nothing unexpected comes up during the due diligence, a financing round will take place at these specifics. In order to be able to invest the respective time and resources, you will need to grant the respective investor(s) exclusivity to close the round (and agree to not discuss the round with any other potential (lead) investor(s)).

btov Term Sheet & Cap Table Template

Here's our own term sheet template. Please feel free to reach out to us, to help you tailor it to your needs. Phrases and words that are marked yellow depend on your / the investors preferences. The rest is - to our opinion - in line with current (rather founder-friendly) market standard.

2021 btov Term Sheet Draft.docx35.8KB

Other Term Sheet Templates

In most countries, industry associations for startups or investors provide standard term sheet templates that reflect current market standards. Here are some examples we deem relevant.

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