Term Sheet Example: What To Include Before Raising Investment

If you’re gearing up to raise investment, a clear, well-structured term sheet is your first building block. It sets the commercial headline terms in plain English so everyone knows what they’re signing up to before lawyers draft the long-form documents.

In this guide, we’ll walk through what a UK “term sheet example” looks like, the key clauses investors expect to see, and how to tailor it to your business. We’ll also flag the legal checks you should keep in mind so you’re protected from day one.

What Is A Term Sheet And When Do You Need One?

A term sheet is a short, non-binding document that records the main commercial terms of an investment or funding round. Think of it as a roadmap: once you and the investor agree the route, your lawyers draft the full agreements that reflect it.

You typically use a term sheet when you’re:

• Bringing in equity investors (angels, funds, strategic partners).
• Issuing convertible instruments (like an ASA or SAFE) that convert to shares later.
• Setting up a seed, pre-seed or Series A round with multiple investors.
• Negotiating a top-up investment with existing shareholders.

Importantly, most UK term sheets are “non-binding” except for a few provisions (like confidentiality, exclusivity and costs). That means either side can walk away before the long-form documents are signed. However, once you sign a term sheet, it sets expectations - so getting it right matters.

If you’re not sure where to start, having a concise Term Sheet prepared and reviewed by a lawyer can save a lot of back-and-forth later.

What Should A UK Term Sheet Include?

Every deal is different, but most investor-friendly term sheets cover the following areas. Below, we explain what each clause does and why it matters for small businesses.

1) Investment And Valuation

• Amount and Instrument: The total amount being invested and whether it’s equity (shares) or a convertible instrument.
• Pre-money Valuation: The company’s value before the new money comes in (drives the price per share).
• Post-money Valuation: The value after the investment (helps everyone understand dilution).
• Cap Table Outcome: A simple summary of percentage ownership after completion.

Why it matters: This is where misunderstandings often arise. Agree the headline valuation early and confirm how any share dilution falls across founders and existing holders.

2) Security, Rights And Preferences

• Share Class: Ordinary or preference shares; any special rights attached (e.g., non-voting).
• Liquidation Preference: Who gets paid first on a sale or winding up, and on what multiple (e.g., 1x non-participating).
• Anti-Dilution: Investor protection if future shares are issued at a lower price (full ratchet vs weighted average).
• Dividend Rights: Whether dividends are declared, cumulative or non-cumulative.
• Pre-emption Rights: Existing shareholders’ right of first refusal on new issues.

Why it matters: These rights shift economics and control. For many early-stage UK deals, a simple 1x non-participating liquidation preference and standard pre-emption is common. Keep terms balanced so future rounds remain attractive.

3) Governance And Control

• Board Composition: How many directors; any investor director or observer rights.
• Reserved Matters: Key decisions that need investor consent (e.g., issuing new shares, changing articles, taking on significant debt).
• Information Rights: Regular financial reporting and budget approvals.

Why it matters: You want investors aligned and informed without creating day-to-day bottlenecks. Calibrate reserved matters for material transactions only.

4) Founder And Team Provisions

• Founder Vesting: Shares subject to vesting and a repurchase or forfeiture mechanism if a founder leaves.
• Good Leaver/Bad Leaver: What happens to unvested/vested shares on departure depending on circumstances.
• Employee Option Pool: Size of option pool pre- or post-money.

Why it matters: Investors want to ensure founders are incentivised to stay and that there’s room to hire. Clear vesting schedules help on both fronts - you can read more about structuring founder vesting in our guide to Vesting Periods.

5) Conditions Precedent And Process

• Due Diligence: Financial, legal and IP checks to be completed before closing.
• Documentation: The long-form agreements to be signed (e.g., Share Subscription Agreement, disclosure letter, updated articles).
• Timeline: Target dates for signing and completion, plus any long-stop date.

Why it matters: Clarity on steps and deadlines keeps the round on track and reduces surprises.

6) Standard Deal Protections

• Warranties: Company statements about the business, IP ownership, litigation, accounts, etc.
• Exclusivity (“No Shop”): A time-limited period during which you won’t solicit other offers.
• Confidentiality: Protection of non-public information shared during negotiations.
• Costs: Who pays legal and due diligence costs and on what basis.

Why it matters: These provisions manage closing risk and expenses. Keep exclusivity tight and costs proportionate to round size.

Term Sheet Example (Annotated)

Below is a simplified “example term sheet” layout with brief annotations. Your exact document should be tailored to your deal, but this gives you a feel for structure and content.

1) Parties And Transaction

• Issuer: (registered number ).
• Investors: .
• Instrument: Subscription for shares.
• Investment Amount: £.
• Pre-money Valuation: £.
• Price Per Share: £.
• Use of Proceeds: .

2) Capitalisation And Option Pool

• Cap Table: Post-completion ownership will be: Founders %, Investors %, Option Pool %.
• Option Pool: , created .

3) Share Rights

• Liquidation Preference: 1x non-participating preference on a sale, merger, or liquidation.
• Anti-Dilution: Broad-based weighted average anti-dilution protection.
• Dividends: Non-cumulative, paid pro rata when declared.
• Pre-emption: On new issues and transfers, subject to customary exceptions.

4) Governance

• Board: directors: founder nominees, investor nominee; investor observer.
• Reserved Matters: Investor consent required for: issuing new securities, varying rights, amending articles, acquisitions/disposals above £, borrowing above £, related party transactions, winding up, or changing business scope.
• Information Rights: Monthly management accounts and quarterly KPI updates; annual budget for approval.

5) Founder Arrangements

• Vesting: 4-year vesting with 1-year cliff; monthly thereafter; acceleration on sale at Board discretion.
• Leaver Provisions: Good leaver retains vested shares; bad leaver required to transfer vested shares at nominal value.
• Undertakings: Full-time commitment, IP assignment, non-compete and non-solicitation covenants.

6) Conditions And Process

• Conditions Precedent: Satisfactory due diligence; adoption of new articles; execution of subscription documents; EIS/SEIS documents (if applicable).
• Exclusivity: 30 days from signing.
• Confidentiality: Mutual confidentiality applies.
• Costs: Company covers reasonable investor legal costs up to £.
• Governing Law: England & Wales.
• Binding Provisions: Exclusivity, confidentiality, costs and governing law are binding; all other terms are non-binding.

Expect these headline terms to be reflected later in your long-form documents - typically a Share Subscription Agreement, updated articles of association, a disclosure letter and, where relevant, a Shareholders Agreement.

Legal And Regulatory Checks In The UK

Even though a term sheet is usually non-binding, you should still keep UK legal requirements in mind during negotiations. Here are the key checks for small businesses.

Companies Act And Articles

• Authority To Allot: Directors need authority to issue new shares and to disapply statutory pre-emption rights where required (Companies Act 2006).
• Share Class Rights: If creating preference shares, you’ll need updated articles to set out the rights clearly.
• Pre-emption: Statutory pre-emption can apply to new issues unless disapplied; ensure your term sheet aligns with your current articles/shareholder consents.

Financial Promotions And Investor Eligibility

• Financial Promotions (FSMA 2000): Be careful with investment communications - they generally need to be made or approved by an FCA-authorised person or fit an exemption (e.g., certified high net worth or sophisticated investors).
• Prospectus Exemptions: Small, private fundraising usually falls within exemptions, but confirm if your round might trigger prospectus or disclosure obligations.

SEIS/EIS Considerations

• Where investors seek SEIS/EIS relief, some terms (like investor protection and liquidation preference) should be structured carefully to maintain eligibility.
• Advance assurance from HMRC can de-risk the process; plan timelines accordingly.

Data, Employment And IP Hygiene

• Data: Investors often check GDPR and Data Protection Act 2018 compliance, privacy notices and security practices.
• Employment: Get your contracts, option schemes and HR policies in order - investors will expect tidy, compliant records.
• IP Ownership: Ensure all IP is assigned to the company and contractor IP is covered by appropriate agreements.

It can feel like a lot, but you don’t have to tackle it alone - a clean diligence pack and clear documentation will help you close faster and on better terms.

Common Term Sheet Variations: Equity, ASA, SAFE And Convertible Notes

Not all funding rounds are straight share subscriptions. Many UK startups bridge rounds using instruments that delay valuation until the next equity round. Your term sheet should fit the instrument you’re using.

Equity Rounds

Investors buy shares now at an agreed price. The term sheet is equity-focused (valuation, share rights, governance). Expect to document the deal through a Share Subscription Agreement and updated articles.

Advanced Subscription Agreements (ASA)

An ASA involves investors paying now for shares to be issued on a future trigger (e.g., the next funding round). There’s no interest, no repayment, and it’s designed to be equity-like for UK tax purposes. Headline ASA terms cover:

• Discount to the next round and/or a valuation cap.
• Long-stop date and conversion mechanics.
• Events that force conversion or repayment (if any).

Build these commercial points into your term sheet and flow them through your Advanced Subscription Agreement.

SAFEs

SAFEs are similar to ASAs but follow a streamlined US-inspired approach. UK versions still need to account for Companies Act requirements and local market practice. Your term sheet should address discount, valuation cap and conversion events, and it should line up with your SAFE Note wording.

Convertible Notes

Convertible notes are debt that convert to equity later, typically with interest and a maturity date. UK investors occasionally use them, but SME founders should pay close attention to:

• Interest rate and accrual mechanics.
• Maturity and what happens if there’s no qualifying round.
• Discount/cap on conversion and any security or ranking.

Whichever route you choose, keep future-proofing in mind. Overly complex rights can complicate your next round and put off new investors.

Practical Steps: From Term Sheet To Completion

Here’s a straightforward path you can follow to move from handshake to funds in the bank.

1) Align On Economics Early

Share a simple cap table showing post-money ownership, including any option pool top-up. If you need a sense-check on price, our guide on how to value your company shares is a good starting point (and don’t forget market context and investor expectations).

2) Draft A Clear, Balanced Term Sheet

Keep it concise, with all core terms in one place. If you expect an exit within a few years, consider whether investor consent and drag-along rights are calibrated to avoid deadlock while protecting minority holders.

3) Run Light-Touch Diligence Upfront

Share essential documents (constitution, cap table, IP assignments, material contracts, data protection policies) early. This builds trust and avoids surprises that could re-open valuation.

4) Lock In The Long-Form Agreements

Turn the term sheet into the full set of documents. For equity rounds, that usually includes a Shareholders Agreement to handle governance and investor rights after closing. For bridges, ensure your ASA or SAFE matches the agreed headline terms.

5) Plan For The Next Round

Terms you accept today will affect your next raise. Keep anti-dilution light, avoid stacking preferences, and size your option pool to cover near-term hiring needs without creating avoidable dilution.

6) Mind The Admin

On completion, make the required Companies House filings, update your registers and issue share certificates. Keep your data room current - it speeds up future diligence and helps with investor relations.

Key Takeaways

• A term sheet is your deal roadmap - agree the valuation, share rights, governance and founder terms in clear, plain language before drafting the long-form contracts.
• Focus on practical investor protections (1x non-participating preference, sensible reserved matters) while keeping the company flexible for future funding.
• Match your term sheet to the instrument you’re using: equity (with a Share Subscription Agreement), an Advanced Subscription Agreement, or a SAFE Note.
• Keep UK legal checks in view: Companies Act authority, pre-emption, financial promotions under FSMA, and SEIS/EIS eligibility where relevant.
• Use your term sheet to set up long-term success - calibrate option pool, founder vesting and drag-along rights so you’re protected from day one and ready for the next round.
• Professional drafting pays off. A well-prepared Term Sheet and clean documents help you close faster and on better terms.

If you’d like help preparing a term sheet or closing your round, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.