Term sheet and investor negotiation terms explained
These come up during a fundraise, in the legal documents and across the negotiating table. This section explains 15 of them in plain English. Jump to the calculators to try them with your own numbers.
Section 5 of 10
15 terms explained
Pitch deck
A short presentation on the problem, product, market, business model, traction, team and how much you are raising.
IM
Information memorandum
A longer document with detailed information about a company or an investment, more common in later rounds and company sales.
DD
Due diligence
The investor's checks on your finances, legal position, contracts, intellectual property and operations before they invest.
LOI
Letter of intent
A document setting out proposed terms for a deal. Whether any of it is legally binding depends on the wording.
TS
Term sheet
A short document with the main terms of an investment, such as the amount, valuation and investor rights. Most of it is not binding, though clauses such as confidentiality and exclusivity can be.
SPA
Share purchase agreement
The contract for buying and selling shares that already exist, for example in a secondary sale or when the company is sold.
SSA
Share subscription agreement
The contract under which an investor buys new shares from the company. In UK rounds it is often combined with the shareholders' agreement.
SHA
Shareholders' agreement
The contract between the shareholders and the company covering rights and duties, such as board seats, decisions that need investor consent, share transfers and what happens when someone leaves.
ROFR
Right of first refusal
The right to buy shares, or another asset, before the owner can sell them to someone else, on the terms in the agreement. UK articles often call this a pre-emption right on transfer.
Pro rata rights
An investor's right to put money into later rounds to keep their percentage, if the agreement gives it.
Liquidation preference
A right for some investors to be paid before ordinary shareholders when the company is sold or wound up, in the events the agreement lists.
Vesting
Earning shares or options over time or by meeting conditions. Unvested shares can be lost or bought back if the holder leaves.
Cliff
A first period, often a year, before any shares vest. Leave before the cliff and nothing has vested.
Drag-along rights
If enough shareholders agree to sell the company, these rights let them make the rest sell on the same terms.
Tag-along rights
If a majority shareholder sells, these rights let minority shareholders join the sale on the same terms.
A funding round in five steps
Pitch deck, term sheet, due diligence, legal agreements, completion. Each document is explained above.
- 1
Pitch deck
You pitch. Investors who are interested ask for more detail, such as your financial model and, in later rounds, an information memorandum.
- 2
Term sheet
The lead investor sets out the main terms. A term sheet is not necessarily binding as a whole, but some clauses can be if they are drafted that way.
- 3
Due diligence
The investor checks your finances, contracts, intellectual property, cap table and team. Having the documents ready in one place speeds this up.
- 4
Legal agreements
Lawyers turn the term sheet into the subscription agreement, the shareholders' agreement and usually new articles of association.
- 5
Completion
Everyone signs, the money arrives and the company issues the new shares, then reports the share issue to Companies House.
Try it with your numbers
Liquidation preference calculator
See what founders receive when the company is sold, with a 1x or 2x preference, participating or not, and at other sale prices.
Founders receive
£1,500,000
50.0% of the sale price, for owning 60%
- Investor£1,000,000
- Founders£1,500,000
- Others (20%)£500,000
- At this price the investor takes the 1x preference (£1,000,000) instead of 20% of the sale, so founders get less than their percentage.
- Investor receives
- £1,000,000
- Multiple on its money
- 1.0x
At other sale prices
The same terms, from a quarter of your sale price to ten times it. Low sales are where the preference matters most.
| Sale price | Investor | Founders | Others |
|---|---|---|---|
| £750,000 | £750,000 | £0 | £0 |
| £1,500,000 | £1,000,000 | £375,000 | £125,000 |
| £3,000,000 | £1,000,000 | £1,500,000 | £500,000 |
| £6,000,000 | £1,200,000 | £3,600,000 | £1,200,000 |
| £12,000,000 | £2,400,000 | £7,200,000 | £2,400,000 |
| £30,000,000 | £6,000,000 | £18,000,000 | £6,000,000 |
One investor class with one preference. Real cap tables often have several classes ranked by seniority, and deal costs and debt come off the sale price first.
Try it with your numbers
Vesting calculator
How many of your shares or options have vested, when the cliff hits, and what you would keep if you left today.
Vested so far
180,000
37.5% of 480,000; 300,000 still to vest
- Leaving now? A good leaver usually keeps vested shares. A bad leaver may have to sell some or all of them back at nominal value or cost, depending on the agreement.
- Vest at the cliff
- 120,000
- month 12
- Each month after
- 10,000
- Fully vested
- Month 48
- Unvested now
- 300,000
Last checked . Estimates only, not financial, tax or legal advice: deal terms vary, so check your documents and take advice before you sign. More terms in the startup glossary.