A term sheet outlines the material terms and conditions by which an investor will invest in your company. It acts as a template which, when agreed upon by both parties, can be used as a reference point to develop a more detailed set of legally binding documents.

In the realm of venture capital, term sheets are distributed to successful candidates once the partners of a VC firm have agreed to begin the investment process and begin due diligence. Term sheets are well suited and widely used in venture capital and fundraising rounds, to maximize efficiency and business efficacy for both parties, whilst curbing legal costs during preliminary negotiations between an investor and a startup.

During any term sheet negotiation, there are two main elements that must be considered: economic conditions and control conditions.


The first recorded use of a term sheet was in1957, with American R&D Corporation agreeing to invest $70,000 USD in Digital Equipment Corporation, in exchange for a 78% stake in the company.

By 1968, American R&D’s investment was valued at over $355 million USD, a 500x return on their initial investment.

Since then, the term sheet has evolved from a simple letter proposing the trade of money for a given percentage equity stake.


Under the principles of commercial law, financing and control term sheets are generally broken down into 4 key segments:

  1. Offering Terms
  2. Subscription Agreement
  3. Shareholders Deed
  4. Other Matters


The Offering Terms lay out the basic framework for the prospective deal, and include some of the most important elements of any term sheet.


The subscription agreement section is concerned with compliance and ensuring that all parties are on the same page when it comes to the legal and financial aspects of the business. We recommend creating an up-to-date data room which you can share with investors, enabling a transparent line of communication, and ultimately maximizing goodwill and negotiation outcomes.


The Shareholders Deed is concerned with the control aspect of the business, to ensure both parties are aware of the expectations and possible changes to the company’s board of directors, strategic direction and future decisions. It could embody the following;

Board of Directors

Board Matters

Liquidation Preference:



Matters requiring Shareholder Supermajority approval.

D&O and Director Indemnification.

Right to participate in in subsequent issues of shares Pro Rata in Future Rounds

Buy Back of Founder Shares

Lock-In Period and Permitted Transfers.


The final section of the Term Sheet is concerned mostly with legal issues and compliance costs. Whilst it is towards the end of the term sheet, it too contains some essential elements that must always be carefully considered

It’s always important to keep sight of the end game, especially as a small business in discussion with investors. From working with many startups and our own personal experience, here are our suggestions – what the Founders should keep in mind throughout the course of Term Sheet discussions;

  • don’t be aggressive on asking for a high valuation as this is the #1 killer of investment deals.
  • Look for smart investors that can add value, get them in early at a lower valuation and then work with them to maximize valuation later.
  • Find an acceptable mid-point between the raise target, valuation and the level of ownership you’re willing to forego.
  • Ensure you make no commitments to guaranteed returns to investors in the event of liquidation (that is, on top of any sort of equity financing agreed upon).
  • Founders should maintain a controlling stake in the business through multiple rounds of funding Similarly, venture capitalists and lead investors often take a big risk when investing in smaller businesses, and as such, will always want to align their interests with the strategic direction of the business. Here’s what investors should always be keenly aware of throughout negotiations.
  • Ensure alignment on desired exit valuation as that may influence the valuation at the time of investment.
  • Ensure investors have the appropriate level of protections and controls over the business such as a Director Position and top quality shareholders agreement prepared by experienced startup investment professionals.
  • Ensure founders and key members of the team are committed to the Company for the long term and are constantly adding value to the investment.

A. J OFFIAH & CO-Ikechukwu Onuoma Esq 

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