What to expect from an early-stage investment term sheet

Ashfords is a Growth Forge partner for 2026, supporting founders with specialist legal guidance across areas like IP, contracts, investment, incentives and wider commercial matters. In this article Jon Groves (managing associate, corporate) and Amelia Roe (solicitor, corporate) discuss what to expect from an early-stage investment term sheet.

Receiving an investment term sheet is a significant and exciting step for any founder. Even though the investment terms are not legally binding at this stage, it is a major vote of confidence in the business. However, it is critical to be aware that a term sheet will include a range of important provisions that can have a lasting impact on both the economics of the investment and the way in which the company is governed moving forward. Alongside valuation, founders should also focus on the key terms which impact the economics of the investment and their control of the company.

The good news is that early-stage investment term sheets in the UK often follow a broadly familiar structure and many provisions are relatively standardised across the venture capital market. Understanding the key terms early can help founders engage more confidently in negotiations and avoid surprises later in the investment process.

In this article, we explore some of the key provisions founders can expect to see in an early-stage term sheet.

Economics: looking beyond valuation

Valuation is usually the headline figure that attracts attention, but it is only one part of the economic package being offered.

Investors will often seek protections designed to preserve value in downside scenarios or future fundraising rounds. Key provisions in the term sheet to achieve this will often include:

Liquidation preferences:

• One of the most common investor protections is a liquidation preference. This determines how proceeds are distributed if the company is sold, wound up or experiences another liquidity event.

• In the UK venture market, if a liquidation preference is included, then a 1x non-participating preference is generally regarded as the most common structure. This structure is focused on downside protection, effectively giving investors the right to receive their investment back before ordinary shareholders participate in any distribution. It means that, on a liquidation event,  investors have a right to either recover their investment (in priority to other shareholders) or participate in the sale proceeds on a normal pro rata basis, whichever gives them the better outcome for the investor.

• There are also other more investor-friendly ways of structuring this, which go beyond downside protection. These include, for example, a participating preference, whereby the investor receives their preference amount first, and then participates in the remaining proceeds pro rata as an ordinary shareholder. This is often called “double dipping” and is much less founder-friendly.

• Understanding how a liquidation preference operates in practice can be just as important as understanding the valuation itself.

Anti-dilution protection:

• Investors may also request anti-dilution provisions. These provisions seek to protect investors if the company later raises money at a lower valuation than the current investment round. The principle is straightforward: investors want protection against a decline in the value of their shareholding caused by a future “down round”.

• The commercial impact of anti-dilution provisions can vary significantly depending on how they are drafted. If anti-dilution protection is included, the market-standard position in the UK is usually a “broad-based weighted average anti-dilution adjustment”. This seeks to balance investor protection against the potentially significant dilution impact that anti-dilution provisions can have on founders and management. Full ratchet anti-dilution (the most investor-friendly version) is generally viewed as investor-friendly and can result in very significant dilution for founders.

Warranties: who is liable and for how much?

As part of the investment process, investors will typically require the company and, in some cases, the founders, to give a package of warranties about the business. These are statements of fact covering key matters which can include the company’s ownership, accounts, intellectual property, customer and supply contracts, employees, regulatory compliance and any ongoing disputes.

The term sheet should set out who is expected to stand behind the warranties and include provisions dealing with the extent of their potential liability. These include financial caps on liability and time limits for bringing claims. These terms will need to be carefully considered within the wider context of the round.

The market position can vary depending on the nature of the investment and the bargaining strength of the parties. However, founders will generally seek to ensure that any personal liability is appropriately limited and that the overall warranty package reflects the early-stage nature of the business. As with many term sheet provisions, the objective is usually to achieve a balanced position that provides investors with appropriate protection without exposing founders and the company to disproportionate risk.

Control: who gets a say in key decisions?

Term sheets will contain provisions dealing with governance and decision-making. While founders want to retain flexibility and control as they grow the business, investors will expect a degree of oversight and involvement following their investment which is intended to protect investors from decisions that could fundamentally affect the value of their investment. To achieve this investors will request terms such as:

Investor consent matters:

• Most term sheets include a list of reserved matters that cannot be undertaken without investor consent. Which investor(s) can provide and/or block that investor consent is an important factor.

• Consent rights usually cover significant corporate actions such as issuing new shares, changing the company’s constitution, incurring substantial debt, making acquisitions, disposing of key assets or altering the nature of the business.

• Founders should carefully review the scope of consent rights. A well-balanced set of reserved matters can provide appropriate investor protection without creating unnecessary operational burdens. As businesses scale, overly restrictive consent rights can slow decision-making and make day-to-day management more difficult.

Board appointment rights:

• Investors may also seek the right to appoint a director or a board observer.

• A director has formal governance responsibilities and participates directly in board decision-making. An observer typically receives board information and attends meetings but does not vote.

• Investors and/or founders may also require the appointment of independent non-executive directors, to bring balance and impartiality to decision making.

• For founders, the key consideration is not simply whether an investor receives a seat at the table, but how the board will function once additional stakeholders become involved. The composition of the board and who controls the majority decision making can influence strategy, reporting expectations and decision-making dynamics long after the investment has completed.

How to review a term sheet

A term sheet should be considered as a package of economic and control rights. A higher valuation may sometimes be accompanied by more extensive investor protections, while a lower valuation may come with a cleaner and more founder-friendly structure. This will need to be considered in the round.

The most successful investment relationships are usually built on alignment rather than maximising advantage for either side. Understanding the commercial effect of the key provisions and negotiating a balanced outcome can be more important than any single headline number or specific term.

Building foundations for growth

Receiving a term sheet is an exciting step, but it is also the beginning of a detailed negotiation process.

Founders should take the time to understand the economic protections and governance arrangements being proposed and, importantly, the impact those arrangements may have over the longer term. A well-structured term sheet can provide investors with appropriate protection while allowing founders the flexibility they need to grow the business.

For more information or support, please contact Ashfords’ corporate team.

Authors: Jon Groves (managing associate, corporate) and Amelia Roe (solicitor, corporate)