Getting a term sheet after months of pitching is a milestone, but it is also a turning point that deserves careful thought.
Even though a term sheet is described as “non-binding” or “not legally binding”, it outlines key terms, like preferred stock, pre-money valuation and investor protective provisions, that will form the foundation of a formal agreement. Early-stage founders are often surprised by how much leverage can be gained – or lost – at this stage.
KEY ISSUES TO KEEP IN MIND: While a term sheet may announce itself as “non-binding”, typically some provisions ARE binding. These can include keeping the existence and terms of the term sheet confidential and refusing to solicit or consider offers from others for a specified period of time. Also, in our experience, it can be extremely difficult to get agreement to omit or substantially change in the binding legal agreements any provisions that are in the term sheet. Conversely, it can be very hard to get into the binding legal agreements, the oral promises and assurances one or more investors may have given to the founders, unless they are set forth in the term sheet.
At Crowley Law LLC, we help our clients approach term sheet negotiation with a strategy tailored to future rounds, equity dilution and the unique risks of their industry.
The structure of a term sheet often reflects the nature of the investor behind it. Venture capital firms may prioritize liquidation preferences and board seats, while angel investors might focus more on ownership percentage or early exit options. Still, there are key elements that appear in nearly every term sheet regardless of the investor profile. Here is what startup founders should know:
Valuation and price per share send strong signals to the market. Agreeing to a lower valuation too early, particularly before hitting meaningful inflection points like data readouts or patent decisions, can not only reduce your ownership percentage but also affect how future investors assess your company. These figures are among the most important terms in any term sheet and should align with both current risk and future potential. A misstep here affects much more than the initial investment amount.
The liquidation preference defines who gets paid, in what order and how much, when the company is sold or closes down. If not negotiated carefully in the term sheet, it can result in early investors receiving a larger share of the exit value, especially when multiple liquidation preference layers are introduced across future rounds. This can leave founders and common stockholders with little to nothing, even when the acquisition price seems solid on paper. Understanding how this clause fits into the broader capital stack is critical to protecting long-term outcomes.
Board control affects how key decisions get made. Founders who give away control too early may find themselves facing resistance on development plans, licensing deals or follow-on investment strategies. These dynamics are often locked in at the term sheet stage, when the pressure to close a funding round can lead to quick concessions. It’s worth stepping back and evaluating how any requested board seats fit into the company’s broader governance structure and future investor landscape.
When protective provisions are not carefully negotiated, they can give investors the ability to block strategic decisions that founders view as necessary for growth. That includes licensing intellectual property, raising additional capital or even entering into a collaboration with another company. Founders should push for clear boundaries around investor approval rights from the start.
When a founder leaves mid-development and still holds a significant stake, it can distort cap tables, raise concerns among future investors and slow momentum. Vesting schedules and transfer restrictions, if structured well in the term sheet, place the company in the best position to handle unforeseen departures without compromising ownership percentage or control. In high-risk, capital-intensive fields, few terms are more important to get right.
Based on our experience advising early-stage companies in life sciences and other technology companies, we have seen how small oversights in the term sheet can lead to disproportionate consequences down the line. In the rush to close a funding round, founders may gloss over clauses that later restrict their flexibility, affect ownership or complicate future investment rounds.
In the pressure of term sheet negotiation, founders may downplay what board control really means. We have seen it result in stalled initiatives when the investor holding a seat disagrees with the company’s change in direction and has veto rights over a change. What seemed like a small concession during the initial investment round can ripple out into major governance friction down the line.
The term sheet may not be legally binding, but agreeing to aggressive liquidation preferences can lock in consequences that are hard to unwind. We’ve seen founders surprised when they walked away with less than expected after a sale despite hitting product milestones. The issue was not the exit — it was the math they didn’t question during term sheet negotiation.
In the rush to close a funding round, founders sometimes give up more control over their intellectual property than they realize. Protective provisions that let investors dictate licensing strategy or product direction can lead to long-term friction, especially when the company pivots or explores new revenue models.The wrong capital type may carry long-term costs that outweigh its short-term benefits. We help startup founders choose financing tools that align with how they operate and what they’re building toward.
Founders often track the equity impact of a single funding round but miss how dilution compounds. One preferred stock issuance leads to another and anti-dilution clauses amplify the effect in down rounds. We’ve seen this dynamic quietly reduce founder leverage before key decisions, whether negotiating future investment rounds or planning an exit.
A term sheet may describe itself as “not be legally binding”, but the decisions made during this phase carry long-lasting consequences. We help our clients approach the negotiation process with an eye toward future investment rounds, risk mitigation preferences and governance dynamics.
Exit scenarios can look very different depending on how the term sheet is structured. We and our network of complementary experts work with founders to model outcomes across various sale prices, investment amounts and equity dilution levels. This helps bring clarity to how preferred stock, liquidation preferences and multiple liquidation preference layers affect both control and value over time.
A term sheet that doesn’t account for the company’s development arc can lead to missteps in ownership percentage and control. We help founders tie legal rights, such as protective provisions and voting thresholds, to the technical and commercial milestones that shift valuation. This alignment makes the negotiation process more strategic and improves the odds of reaching the next round on better terms.
We help our clients assess whether term sheet clauses will hold up under the pressure of negotiations for future financings – especially those that may involve preferred stock and institutional investors. That means modeling how liquidation preferences, protective provisions and voting rights may shift investor dynamics in future rounds. Stress-testing these terms now gives founders a clearer picture of how current decisions affect later control, ownership percentage and company valuations.
Information rights, observer privileges and voting rights may not be the loudest terms in a term sheet, but they often outlast the funding round in influence. We help our clients pressure-test these provisions based on expected growth, preferred stock dynamics and the mix of other investors coming in. Soft terms can either support founder leadership or slowly erode it.
We help founders understand what’s at stake, model what’s ahead and negotiate terms that work beyond the current raise. Reach out to Crowley Law LLC at 908-738-9398 before signing anything that could shape the future of your company.
The term sheet itself may not bind the parties to enter into the transaction outlined, but it sets the tone for the rest of the deal. Founders often find that once it’s signed, it’s difficult to walk back key terms without risking investor trust or a failure to conclude a deal. Legal counselors refer to this as “deal momentum.” That’s why we encourage early-stage companies to negotiate the term sheet with the same care as the final agreement.
The pre-money valuation is the company’s value before an investment round, while the post-money valuation is its value after factoring in the investment. The post-money valuation includes the new funding, so it’s higher than the pre-money figure. Understanding both is crucial, especially when assessing how much of the company you’ll give up. Founders should know that post-money valuation will determine ownership stakes and potential dilution.
Before signing a term sheet, it’s critical to model various financial outcomes, such as the effect of liquidation preferences and the potential dilution from future funding rounds. Founders should also consider the impact of key governance terms, like board control and voting rights. Assessing the potential exit scenarios, whether through acquisition or Initial Public Offering, will help clarify the long-term implications of the deal. This allows you to enter negotiations prepared and align the terms with your company’s growth trajectory.
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