Before the term sheet arrives: what founders need to know
Every founder goes into a raise with a fixed amount of investor goodwill. Spend it negotiating the terms that will shape your company for the next decade and it’s well spent. Spend it on a missing shareholder address or a co-founder buyback nobody papered properly, and it’s gone before the real negotiation has started.
That was the thread running through our session on term sheet essentials with David and Tim from Lewis Silkin. Here’s what founders should sort before an offer lands, and what to look for once it does.
Get your cap table right before anyone asks
Start with the basics. Every shareholder needs a correct legal name, address and email on record. It sounds trivial, but a classic failure is shareholders who only engage when they’re asked to sign. That’s when the errors surface, and the deal stalls just as everyone wants to complete.
Numbers matter too. Fifteen to 20 shareholders at Series A is now normal. 187 is a problem.
Then check what your cap table is counting. Issued shares carry votes. Options, advance subscription agreements (ASAs) and SAFEs don’t until they convert. You need both views: issued shares show who controls a vote today, and a fully diluted view shows who owns what once everything converts. Split your option pool as well, so allocated options and the unallocated pool appear as separate lines.
If you’ve raised on an ASA, SAFE or convertible, model the conversion from the documents you signed, not from what you assume is market standard. That applies to AI tools too, which will happily fill in standard terms that don’t match your paperwork. A plausible percentage built on the wrong terms is worse than no percentage at all.
Clear up the shares that aren’t on the table
Two problems come up again and again.
The first is shares promised but never issued. An early adviser or hire was told they’d get equity, and nothing happened. There are three ways to resolve it: confirm the work that would have earned the shares was never done, get a waiver, or issue the shares.
The second is departed shareholders. A co-founder leaves and the remaining team assumes their shares were “taken off” the cap table. Shares can’t simply be removed. They need a proper legal process, and a good rule of thumb is that if no lawyer was involved in a buyback, it probably wasn’t done correctly.
Make sure the company owns its IP
IP that employees create in the course of their work belongs to the company. Contractors are different, and so is AI-generated content: what the company owns depends on the contract or the tool’s terms, so check them.
Founders often forget themselves. If you built anything before the company existed, or outside an employment contract, assign that IP to the company now. As David pointed out, it’s cheap and simple before an investor asks. Once it’s a due diligence finding, it’s slower and more awkward.
Then put everything in a well-structured data room and share it early. Lewis Silkin’s data room toolkit is a good place to start.
Read the term sheet as the start of a relationship
A term sheet has three parts: the commercial terms, which are non-binding; exclusivity, which is binding; and commitments about the process.
Don’t take much comfort from “non-binding”. The commercial terms are the most important part of the document, because reopening them once lawyers are drafting the long-form agreements is slow and costs goodwill. If something matters to you, raise it now.
Beyond valuation, look closely at four things.
The board: After investment, it’s where decisions get made, and Tim encouraged founders to be deliberate about its make-up from Series A onwards.
Shareholder thresholds: Under the Companies Act 2006, an ordinary resolution needs a simple majority (more than 50%) of the votes and a special resolution needs at least 75%, so anyone holding more than 25% of the votes can block a special resolution. An investor with 15% has none of that power, so they’ll ask for contractual consent rights instead: a list of decisions you can’t take without their approval.
The definition of “investor majority”: This is the clause founders should scrutinise most closely. It decides which investors, acting together, can give or withhold consent, so it’s effectively the shield around those consent rights. It matters most when you have several investors or seed investors staying on the cap table.
The cap table appendix: The pre- and post-money cap table must be attached to the term sheet. Once an investor has relied on it, errors are very hard to correct.
Read the warranties as if you’re giving them personally, because you probably are
Warranties are contractual statements about the business: its IP, employees, litigation, assets, history and business plan. They cover the past and present, never the future.
The UK Private Capital standard (formerly the BVCA) has the company giving the warranties. In practice, David explained, most investors depart from that and ask founders to give them personally. The logic is that the threat of personal liability makes founders disclose thoroughly.
That’s where the disclosure letter comes in. It’s the only place an exception counts. Something you mentioned in a meeting, or a document sitting in the data room, doesn’t count unless it’s in the letter. If it’s left out, the warranty stands as absolute.
So negotiate the limits:
Qualifiers on specific warranties, such as “material” or “so far as we are aware”
A time limit for bringing claims
A cap on each founder’s liability, which can reflect personal circumstances
A de minimis threshold, below which individual claims can’t be brought
A basket: a total that claims must exceed before an investor can act
Start on the disclosure letter early. You know your business better than your lawyers do, and it always takes longer than you expect.
Agree leaver provisions while everyone’s still friends
The UK standard is four-year reverse vesting with a 12-month cliff. Leave in the first year and you lose everything. After that, your shares vest over the remainder of the four years.
What happens when you leave depends on why.
Bad leaver: gross misconduct, criminal offences, fraud or breaching a non-compete. You typically have to give up all your shares, usually at the lower of cost and market value, and these triggers are rarely worth negotiating.
Good leaver: illness, death or wrongful termination. The vesting schedule applies, and you keep what has vested.
Voluntary departure is where things are changing. In the February 2025 UK Private Capital precedent, it now sits in square brackets, which signals an emerging middle ground: an intermediate leaver with its own vesting schedule. That’s worth arguing for if you’ve spent years building the company on below-market pay.
A few more points:
With co-founders, consider each person’s provisions individually. If they’re missing from the term sheet and a co-founder walks, you have no leverage.
Apply the same thinking to option holders.
If you vested during your seed round, negotiate credit for that time rather than starting the clock again.
Forfeited shares usually become deferred shares: no votes, nominal economic rights, and no awkward discussion about who should get them.
Save your goodwill for the terms that matter
You can’t resolve everything before a term sheet arrives. But accurate records, settled share and IP questions, and a clear understanding of the clauses that will shape your relationship with investors mean your goodwill goes on the negotiation, not the admin.
Meet the Speakers
David Willbe
David is co-head of Lewis Silkin’s Technology sector group and one of the leaders of its Startup initiative. He advises startups and investors at every stage, from early rounds through to exit, across sectors including fintech, life sciences, hardware and gaming, and speaks regularly at startup events on the legal pitfalls founders face.
Timothy Leeson
Timothy leads Lewis Silkin’s Corporate Finance offering, advising founders, growth companies, investors and financial institutions on everything from early-stage funding to exits via M&A or IPO. He has 30 years’ experience supporting technology businesses and their backers, with a strong international practice focused on the US, the Middle East and Asia-Pacific.
David, Tim and the wider Lewis Silkin team are actively involved with VenturePath to support scaling founders. Connect with them and tap into their knowledge and experience through the platform. If you’re not yet a member, sign up today to access insights and support as you scale your business.
