Guide · EasyCofounder
The term sheet: understanding and negotiating an investor’s offer
Receiving a term sheet is a milestone in a funding round, but it is also the moment when most of the balance between founders and investors is decided. This guide describes the clauses you will find in one, picks out those that matter most, explains what is actually binding and walks through the steps to final signing.
Updated on 5 min readBy the EasyCofounder team
In short
- A term sheet sets out the main conditions of an investment: amount, valuation, financial rights, governance and completion conditions.
- It is generally not binding as to completing the deal, except for clauses such as confidentiality or exclusivity.
- It frames all the documentation that follows, so negotiate it carefully before signing.
Contents
What is a term sheet, and does it bind the founders?
The term sheet, sometimes called a letter of intent, summarises the terms of a proposed investment in a few pages. It is the basis for drafting the final documents: amendments to the articles of association, the shareholders’ agreement and the investment agreement.
Its legal force depends on its wording. Most clauses are presented as non-binding, while some are expressly binding, such as confidentiality, exclusive negotiation for a given period or the payment of certain costs.
Under French law, pre-contractual negotiations are free, but their start, conduct and termination must meet the requirements of good faith (Civil Code, article 1112). Breaking off talks in bad faith can therefore create liability even when the term sheet itself is non-binding.
What are the economic clauses?
The economic clauses determine how much the investor pays and what they get back in the event of a sale or liquidation.
- The amount invested and the pre-money or post-money valuation, which you should always have spelled out.
- The BSPCE pool (French employee stock options) to be created and when it is created, before or after the investor comes in, which changes the founders’ dilution.
- The liquidation preference: the investor gets back all or part of their money first in the event of a sale, with or without a share of the rest of the price.
- Anti-dilution clauses in case of a future round at a lower valuation, covered in our guide to founder dilution.
- Any payment in several tranches, conditional on reaching milestones.
A startup receives two offers. The first shows a higher valuation but includes a participating liquidation preference and a BSPCE pool created before the round. The second is valued slightly lower with a simple preference. By modelling a modest sale, the founders find they would receive more under the second offer.
What are the control and governance clauses?
Control clauses organise decision-making power after the round, and they weigh on the founders’ day-to-day work for years.
| Clause | Principle | Question to ask |
|---|---|---|
| Strategic committee | Composition and role of the oversight body | Do the founders keep a majority of the seats? |
| Major decisions | List of decisions requiring the investor’s approval | Is the list limited to exceptional matters? |
| Information rights | Regular reports sent to investors | Is the frequency manageable for a small team? |
| Pre-emption | Priority to buy shares that are being sold | Who benefits, and in what order? |
| Tag-along | Right to sell on the same terms as another shareholder | From what threshold does it apply? |
| Drag-along | Obligation to sell if a majority accepts an offer | Which thresholds and which price guarantees? |
The term sheet also often covers the founders’ commitment: exclusivity, non-compete, vesting of the founders’ shares and good leaver and bad leaver clauses, all points to discuss with your co-founders before replying.
How do you negotiate a term sheet?
- 1Read the whole term sheet with your co-founders and list the points that raise questions.
- 2Have your adviser model how the price would be split under several sale scenarios, from the most modest to the most favourable.
- 3Sort the points into three categories: essential, negotiable, acceptable as they stand.
- 4Reply in writing with precise, reasoned proposals rather than blanket refusals.
- 5Compare with other offers if you have any, without using them in a misleading way.
- 6Check the length of the exclusivity period before signing, so you do not block other discussions for too long.
To place these discussions within the round as a whole, see our guides to pre-seed funding and finding angel investors.
What happens after the term sheet is signed?
- 1The investor carries out its checks, as described in our guide to due diligence and the data room.
- 2The lawyers draft the final documents: investment agreement, shareholders’ agreement and amended articles of association.
- 3The shareholders meet to approve the transaction in line with the rules set by the articles of association.
- 4The funds are paid and the shares issued at closing, then the cap table and the share register are updated.
This phase often takes several weeks. Keep enough cash in reserve and keep the business moving, because a visible slowdown during this period can weaken your position in the negotiation.
Frequently asked questions
Is a term sheet legally binding?
It generally is not as to completing the investment, but some clauses are expressly binding, such as confidentiality or exclusivity. Its exact scope depends on the wording and should be checked by a lawyer.
What is a liquidation preference?
It is a clause that lets the investor get back all or part of their money first in the event of a sale or liquidation, before the other shareholders, with or without the right to share in the rest of the price afterwards.
How long does term sheet exclusivity last?
The length is negotiated case by case and should match the time genuinely needed for due diligence and drafting the documents. Exclusivity that lasts too long prevents you from talking to other investors.
Do you need a lawyer for a term sheet?
It is strongly recommended. Economic and control clauses have technical effects on dilution and on how the sale price is split, which a lawyer used to funding rounds knows how to model and negotiate.
Glossary
- Term sheet
- A document summarising the main conditions proposed by an investor before the final documents are drafted.
- Liquidation preference
- The investor’s right to get their money back first in a sale or liquidation.
- Closing
- The final completion of the round: signing the documents, paying the funds and issuing the shares.
- Drag-along
- A clause requiring minority shareholders to sell their shares if a majority accepts a purchase offer.
Sources
Official texts and reference pages used for this guide
- French Civil Code, Article 1112 (Légifrance)
- French Civil Code, Article 1124 (Légifrance)
- Bpifrance Création, raising equity funding
These are French official sources: the rules described apply to companies governed by French law.
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Further reading
- Valuing your startupStartup valuation explained: pre-money and post-money, how to work out the stake you give up, early-stage methods and how to negotiate without selling cheap.
- Preparing for due diligenceStartup due diligence: what investors check, the documents to put in your data room, a checklist and the blocking issues to fix early.
- Shareholders’ agreementShareholders’ agreement: what it is for, how it differs from the articles of association, common clauses between co-founders and when to sign it.
- Understanding dilutionFounder dilution: how to calculate it at each round, the effect of stock option pools and convertibles, anti-dilution clauses and how to stay in control.
About this guide
This guide was written by the EasyCofounder team — a platform that connects founders, talents and startups — and was last updated on November 9, 2026. It draws on common startup practice and on the questions our members ask.
How we write, review and update our guides is explained on our About page.
It provides general guidance and is not legal, tax or financial advice. For your own situation, consult a qualified professional (lawyer, accountant) and the official resources available in your country.