Seven term sheet clauses every founder should read twice

A term sheet is a short document that summarizes the main terms of an investment. Most founders look at the valuation first, but the clauses that decide how the company is run, and who gets what in a sale, usually sit elsewhere. Here are seven points worth your attention before you sign.

1. Valuation: pre-money or post-money?

The same number gives a different ownership percentage depending on whether it is a pre-money or a post-money valuation. Whether the option pool is included in the valuation also affects your dilution directly. Work out the percentage you will hold after the round, not just the headline number.

2. Liquidation preference

A liquidation preference sets who gets paid first, and how many times their investment, when the company is sold or wound up. The multiple, and whether the preference is “participating”, can change what founders receive in a modest exit considerably.

3. Anti-dilution

Anti-dilution protects the investor’s position if a later round is priced lower. The mechanism matters: the difference between “full ratchet” and “weighted average” falls very differently on founders in a difficult round.

4. Board and veto rights

The size of the board, who appoints its members, and which decisions need investor consent (reserved matters) determine day-to-day control. Read the list item by item: budgets, new funding, and senior hires may all be on it.

5. Founder vesting

Investors usually ask for founder shares to vest over time. The period, the cliff, and what happens when a founder leaves (good leaver / bad leaver) are all negotiable. You can ask for the time you have already put in to be counted.

6. Tag-along and drag-along

Tag-along lets other shareholders join a sale on the same terms. Drag-along lets a defined majority require the others to sell. Check which majority is needed and whether a minimum price applies.

7. Binding terms and exclusivity

Most of a term sheet is usually non-binding, but confidentiality and exclusivity (no-shop) clauses are typically drafted as binding. During the exclusivity period you cannot talk to other investors, so make sure the period is reasonable.

How this translates into Turkish law

How these terms are put into effect under Turkish law needs separate thought. Some rights, such as a preference on liquidation proceeds, are created in a joint stock company through privileged shares granted in the articles of association (Turkish Commercial Code, Art. 478). Other terms appear only in the shareholders’ agreement and bind only the parties to it. The management structure also depends on the type of company. What is said above about the board assumes a joint stock company.

In short

A term sheet is brief, but it sets the frame for the shareholders’ agreement that follows. A term accepted at this stage is hard to take back later, which is why the clauses are best assessed together, before signing.