A guide to building your Term Sheet on SeedLegals
Your Term Sheet is the first thing your investors will see as part of your funding round. It’s a non-binding agreement that contains the key terms upon which they’re investing into your company. Have a read of this article, alongside the hint text, so you feel confident making your selections!
For each section below, head over to the SeedLegals Termometer to see what's market standard for your size funding round.
1) Instant Investment
Instant Investment is an agile funding concept specific to SeedLegals and is expertly laid out in this article. Essentially, Instant Investment allows you to raise additional funds after your round closes, on the same terms as the funding round, without having to get new shareholder consent or complete preemption. This can be done at the same price per share of your round or higher.
We recommend you enable Instant Investment in your funding round, as you’re basically buying the flexibility to top up your round in the future and getting all of the necessary approvals upfront. You can always use this product afterwards regardless, but why not give yourself the flexibility now.
The usual time frame can be a few months after your target closing date and the amount can be at least one third of your current raise. The one thing to note here is regarding the preemption - giving investors a preemption right almost defeats the purpose of Instant Investment (as you’d have to circulate preemption documents) - so we recommend you disapply preemption here so as to avoid added admin down the line.
A preemption right is something all shareholders have by law - it’s essentially the right to purchase shares before those shares are offered to new investors. This allows existing shareholders to top up their investment in the company so as to maintain their shareholding and avoid being diluted.
Preemption on future funding rounds would generally be issued to all shareholders/all voting shareholders. As for preemption on share transfers, it is up to you to decide who you’d want to be offered shares first if one individual wanted to sell. The standard here is all shareholders first, but you may want founders to have the first say on any share transfers.
3) Drag Along, Tag Along, Co-Sale
Drag Along is a provision to protect the company from minor shareholders in the event you want to sell the company. It means that if a majority, which you can specify here, agree to the sale then the minority shareholders will also be obliged to sell. Typically this would be at least 70-75% as you want to ensure a sizeable portion of the company wants to sell before everyone is brought along for the ride.
Tag Along is a standard investor protection. It means that if some shareholders want to sell shares to a buyer who would then own a majority of the company (i.e. there’d be a change of control), all other shareholders have the right to sell their shares at the same price.
Co-Sale is also seen as a standard protection. Similar to Tag Along, it means that if an individual is selling some of their shares, other shareholders can sell a pro rata amount of their own shares too. Having this triggered from founders only is what we’d expect to see in the majority of cases.
4) Investor Consent
Introducing investor consent adds an extra layer to how your company will be run. Where you’d normally just need board approval (and sometimes a Shareholders Resolution) for certain decisions, there would be an added step of investor approval. For a ‘small set of key decisions’, you’d need investor approval for:
Selling or liquidating the company
Changing the articles or the company structure
Issuing new shares above what is already agreed
The standard provisions are for New Investors only, and 50% of these new investors.
This is a common negotiation point and is not necessary to offer unless specifically asked for, especially if you’re an early stage company and it’s your first funding round. In larger rounds (£1M+), it’s almost always included.
For more on investor consent and market standards, have a read of this guide.
5) Directors and Observers
Please note that Founder Directors do not have to be founders - they're just directors that you as founders would appoint. Additionally, the independent director role should only apply if you're appointing someone in this funding round.
If investors have asked for a board seat (which means they would become an Investor Director), there are a few things to be aware of. Most importantly, the role of an Investor Director typically comes with additional consent rights. In practice, these consent rights can act as a veto on certain board decisions. You can always finetune this later in your funding round, but we generally advise you only have an Investor Director if specifically asked. See more on Investor Directors here.
For more on your Board and company governance, have a look at this collection in our help centre.
6) Founder Share Vesting
To start, have a look at this guide which explains vesting. Essentially, vesting means that founders own all of their shares as normal, but if someone leaves before the end of the vesting period, either the Company or the remaining founders will receive the unvested shares back.
As you can probably now tell, founder share vesting is something that protects the company in the event that a founder leaves - otherwise they'd be walking away with a potentially large number of shares and voting power. For more information on why it’s important, see here.
We’ve found that the majority of investors would expect to see this exist in some capacity - particularly where there are multiple founders in the company. A standard (and quite founder-friendly) vesting schedule would be 3 years, vesting monthly, with no cliff - more info here.
If you decide to allow for founder share vesting, the next page (Leaver Provisions) is where you’ll determine exactly what happens to vested/unvested shares in the event a founder does leave the company. If not, the Leaver Provisions do not apply.
The Warranties are a set of promises you would make on behalf of the company, to ensure the investors have some protection that what they’re investing in is sound. If these are breached, then investors can make a claim against the company and maybe the founders. The Warranties are laid out in the Disclosure Letter, and should be an accurate representation of the company as it currently stands.
This guide goes into more detail on the Disclosure Letter and its role in your round.
8) Completion Conditions
This section lays out what would need to be done in order for the round to close. You don’t necessarily need to have a minimum investment amount or a lead investor, but add those in here if you wish to have specifics.
The due diligence refers to what would be done by your investors on the company - the standard here is Legal. Have a look at our Due Diligence checklist in the Agreements section to get an idea of what investors would be looking at.
Lastly, you do not need to commit to having certain Insurances in place. If you have plans to in the foreseeable, then great, but you can also leave this open-ended.
9) Display Options
At this stage, you may wish to mask certain items of information - your cap table, the names of investors - but you would always need to disclose these when you get to the next stage of your funding round and start circulating your Shareholders Agreement.
So it’s perfectly fine to mask some information now (which would put everything into ‘Draft’ mode) but just remember to come back and display all of the information before you send out your long form documents!
If you have any questions on your Key Deal Terms, your dedicated Investment Expert or our team on the live chat feature would be more than happy to assist! Reach out to us at anytime.