What is a Term Sheet? Key Considerations in Investor Agreements

If you are a startup founder raising funds at the pre-seed, seed, or Series A stage, chances are you will come across a term sheet. This document signals that you are on the verge of securing investment—a major milestone for your company. Both you and the investor are excited, but before you sign anything binding, you need a preliminary agreement that outlines the framework of the deal. That’s exactly what a term sheet provides.

If you are a startup founder raising funds at the pre-seed, seed, or Series A stage, chances are you will come across a term sheet. This document signals that you are on the verge of securing investment—a major milestone for your company. Both you and the investor are excited, but before you sign anything binding, you need a preliminary agreement that outlines the framework of the deal. That’s exactly what a term sheet provides.

Think of a term sheet as an engagement before marriage or a script before the movie. While it is not legally binding (in most cases), it sets the tone for negotiations. It’s the first handshake—and it can grow into a strong partnership or, if overlooked, expose you to risks later.

As a founder preparing for investment, this is where the real negotiation begins. The term sheet covers critical items such as valuation, anti-dilution, investment amount, equity distribution, board seats, and voting rights. It serves as an important reference point for both founders and investors as the investment process progresses. However, note that a signed term sheet does not guarantee the investment will be completed.

The term sheet merely defines the general framework. The actual binding terms are later detailed in the Shareholders Agreement (SHA), which specifies investor rights, obligations, and participation conditions.

In this article, we highlight the most common investor demands in term sheets and the red flags founders should watch for. While most terms are non-binding, the following provisions usually are:

• Confidentiality obligations: requiring parties to keep negotiations confidential.
• No-shop / Exclusivity clause: restricting the company from engaging with other investors for a certain period, as investors invest significant time and resources during due diligence.

Investors use term sheets to maximize potential upside while minimizing risk. Below, we break down the most important clauses and how you should interpret them.

1. Understanding Pre-Money vs. Post-Money Valuations

This seemingly technical distinction can have a huge impact on how much equity you give away. If it’s not clearly stated whether the valuation is pre-money or post-money, founders may face unexpected dilution, especially when option pool adjustments are involved.

Example: A founder believed they were giving away 17% equity at a $5M post-money valuation. In reality, it was based on pre-money valuation, costing them an additional 3% equity. When combined with an option pool carved out of founder equity, dilution could reach 13%.

Our advice: Always clarify whether the valuation is pre-money or post-money, and ask how the option pool is calculated. If anything is unclear, request explicit language or consult your lawyer.

2. Liquidation Preference

This clause determines how and when investors get paid in an exit, and it can significantly affect how much you, as a founder, walk away with.

Red flags to watch for:

• Liquidation preference above 1x (e.g., 2x or 3x).
• Participating preferred structures (investors get their money back first, then also share in remaining proceeds).
• Scenarios where investors take all their money upfront before others get anything.

Example: An investor puts in $1M for 17% equity, with a 3x liquidation preference. If the company sells for $6M, the investor takes $3M first—leaving the founder with less than the investor, despite building the company.

Our advice:

• Know exactly what multiple applies (1x, 2x, etc.).
• Ask whether it’s participating or non-participating.
• Push for non-participating 1x wherever possible.
• Model exit scenarios to understand impact.

3. Clauses Restricting Future Fundraising

Some term sheets include clauses that make raising future rounds difficult.

Red flags to watch for:

• Overly restrictive pre-emptive rights.
• Requiring investor approval for new share issuance.
• Mandatory approval for M&A activity.

Example: A founder agreed to a clause requiring unanimous investor approval for new funding rounds. When one investor refused, the round collapsed, leading to cash-flow problems and the startup’s eventual failure.

Our advice: Ensure your term sheet leaves room for future fundraising. Be wary of clauses that let small shareholders or misaligned investors block progress.

4. Anti-Dilution Clauses

Anti-dilution protects investors if future rounds are raised at a lower valuation (down rounds). But it usually comes at the expense of founders.

Red flags to watch for:

• Full-ratchet anti-dilution: recalculates investor equity at the lowest new share price.
• Severe dilution of founder ownership in down rounds.

Example: A startup raises at $10M valuation, but the next round is at $5M. Full-ratchet anti-dilution allows earlier investors to adjust their shares as if they invested at $5M, wiping out a large portion of founder equity.

Our advice:

• Negotiate for weighted average anti-dilution, which is fairer than full-ratchet.
• Review these clauses carefully in the SHA.

5. Loss of Control at the Board Level

Investors often ask for board seats, which is reasonable—but too much control early on can cripple a startup.

Red flags to watch for:

• Investors demanding board seats at pre-seed stage.
• Investors holding majority control of the board.
• Veto rights on routine decisions (hiring, small loans, spending, pricing).

Example: A founder gave away two board seats at pre-seed. Within six months, investor vetoes slowed decision-making, delaying product development and stalling growth.

Our advice: Keep the board founder-heavy at early stages. Be explicit about which decisions require board or investor approval.

6. Warrants (Equity Purchase Rights)

Warrants let investors buy additional equity at a set price in the future. Harmless at first glance, they can cause unexpected dilution.

Red flags to watch for:

• Long expiry periods.
• Low strike price compared to future market value.
• Warrants not tied to performance milestones.

Example: An investor put in $500K with a warrant to buy another $500K in equity at $1/share. When the startup’s value rose to $3/share, the investor exercised the warrant, ending up with 30% equity instead of 20%, blindsiding the founders.

Our advice:

• Review strike price, duration, and size of warrant.
• Tie warrants to performance milestones if possible.
• Avoid open-ended warrant clauses.

Final Thoughts

Heavy-handed term sheets can be dangerous—they give investors excessive control and upside at the founder’s expense. Always:

• Understand every clause and its potential impact.
• Negotiate key terms to protect founder equity and control.
• Compromise on minor points, but stand firm on critical issues.

The goal is to strike a fair balance that protects both sides and sets the foundation for long-term growth.

Boğaziçi Ventures’ Commitment

For over a decade, we have worked with dedication to contribute to and create value in Turkey’s tech startup ecosystem. With our deep expertise and strong business network, we support entrepreneurs in building globally competitive businesses. At Boğaziçi Ventures, we believe in leveraging the power of technology across multiple verticals to deliver sustainable and intelligent solutions.

We invite entrepreneurs to apply for investment meetings with Boğaziçi Ventures via [email protected] . Take this opportunity to scale your startup and join our global business network today!