Raising early-stage investment is a pivotal milestone for any startup, and for many founders receiving a term sheet feels like the moment everything is finally coming together. But that first flush of excitement can quickly give way to uncertainty. What do the terms really mean? Which ones are negotiable? And how do you protect your long-term position without putting off a potential investor?
This article is for founders navigating the early stages of fundraising who are already aware of how term sheets work, whether you're preparing for your first funding round or already reviewing term sheets from interested investors. If you need more information on what term sheets are before reading this article, you can read our term sheet guide.
We’ll guide you on how to approach term sheet negotiations with clarity and confidence. The right legal advice goes beyond ticking a box - it helps uncover hidden risks, protect your business for the future, and avoid costly issues later. Backed by years of experience supporting start-up founders, we’re here to help if you need advice on your term sheet.
Contents:
Understand what’s standard, and what’s not
One of the most effective ways to approach a term sheet negotiation is to understand what’s market standard. Many terms have become industry norms and knowing what’s typical can help you quickly spot when something is out of step or unusually weighted in the investor’s favour.
For example, a 1x non-participating liquidation preference is standard in early-stage UK funding rounds. This means investors get their money back before founders and other shareholders if the company is sold or liquidated, but they don’t also take a share of the remaining proceeds. In contrast, a participating liquidation preference, where investors ‘double dip’, is more aggressive and often worth pushing back on.
Other standard terms to be aware of include:
- Anti-dilution protection: It’s normal for investors to want protection if your company raises money later at a lower valuation. A ‘broad-based weighted average’ method is fair and widely used. Be cautious of ‘full ratchet’ protection: it’s rare and can significantly reduce your ownership.
- Founder vesting: It’s standard for founder shares to vest over four years, with nothing vesting until after the first year. This protects the company if a founder leaves early. Just watch out for unusually strict terms if you’re already a year or more into the business.
- Board seats: Investors often ask for a seat on the board. That’s fine, but the board should still reflect founder control at the early stages.
- Drag-along rights: These allow many shareholders to force a sale of the company, which can be helpful - but make sure the thresholds are reasonable, so you’re not pushed into a deal you don’t support.
Understanding what’s market can give you a powerful advantage in negotiations. It lets you prioritise your pushback and avoid getting drawn into battles over terms that are fair and common, while focusing your energy where it counts.
And if you’re unsure what’s standard in your sector or stage, a lawyer who works with start-ups day-in, day-out can help benchmark offers quickly, saving you hours of second-guessing and helping you negotiate from a position of knowledge.
Prioritise your non-negotiables
Not every term is worth fighting for. To negotiate effectively, founders need to prepare fully for the negotiations and identify their non-negotiables early: the points you’re not prepared to concede because they impact your control, your upside, or your start-up’s future flexibility.
For many founders, that means:
- Maintaining a degree of board control: Giving investors a seat at the table is often fine, but giving away majority control too early can hamstring decision-making and dilute your vision.
- Protecting founder equity: Watch out for terms that trigger additional dilution (like aggressive anti-dilution clauses or large option pools created pre-money). Founders who give away too much too soon can find themselves locked out of future gains.
- Preserving flexibility for future fundraising: You don’t want today’s terms to block tomorrow’s growth. Terms like pay-to-play or overly restrictive pre-emption rights can limit your options in later rounds or make it harder to bring in new investors.
- Avoiding punitive investor protections: Clauses like multiple liquidation preferences, excessive veto rights, or guaranteed internal rates of return (IRRs) are generally not standard at early stages and can signal a misalignment of interests.
Of course, what’s non-negotiable depends on your business, your stage, and your longer-term goals. Some founders care deeply about control. Others are more focused on valuation or exit flexibility. What matters is being clear about your red lines and communicating them confidently in the negotiation.
Legal advisors with experience in early-stage investment can help you stress-test your thinking here. They’ll highlight the longer-term impact of certain terms and help you choose your battles wisely, so you’re not spending energy or goodwill on the wrong things.
Think beyond valuation
It’s easy to fixate on valuation, especially in a competitive fundraising environment. A higher valuation can feel like a validation of everything you’ve built and a win to share with your team and investors.
But a headline valuation is only one part of the story. If the underlying terms are overly aggressive or one-sided, the deal can end up costing you far more than it’s worth.
For example, a high valuation paired with:
- Heavy liquidation preferences (e.g. 2x or participating preferred shares)
- Large investor-friendly option pools created pre-money
- Strict anti-dilution clauses that penalise you in a down round
can dramatically reduce your economic outcome if things don’t go perfectly.
Worse, these terms can impact your future fundraising too. A high valuation today may set unrealistic expectations for your next round, especially if growth hasn’t kept pace. That can lead to a down round, which affects both your leverage and your reputation in the market.
Sophisticated investors know how to structure deals that look founder-friendly on the surface but contain protections that shift risk and reward back in their favour. That’s why it’s essential to look at the whole term sheet, not just the number in bold at the top.
Having a lawyer review your term sheet isn’t about slowing things down, it’s about ensuring you understand the true cost of the deal and how it plays out over time. With the right advice, you can strike a balance between a valuation you’re proud of and terms you can live with.
Use competing investor interest to your advantage
If you have more than one investor interested, you’re in a stronger position than you might think. Competitive tension doesn’t need to mean playing investors off against each other, but it does mean you have options, and that gives you leverage.
You can:
- Use one offer as a benchmark to improve another
- Push back on harsher terms by referencing more founder-friendly proposals
- Accelerate timelines by signalling urgency without giving up control
Investors expect a degree of competition, especially in strong start-ups. A lawyer can help you navigate this dynamic professionally, advise on exclusivity clauses, and keep your options open until the right terms are on the table.
Know where you can give ground
You don’t have to win every point. In fact, trying to do so can damage trust and slow down your deal. Smart negotiation means knowing where you can give ground without compromising your future.
Some examples:
- Agreeing to observer rights instead of a board seat
- Accepting reasonable reporting obligations or consent rights
- Negotiating the size and timing of option pools to minimise dilution
- Allowing drag-along rights but with appropriate thresholds
Conceding on the right terms can make you appear commercially minded and help you secure better outcomes on your true priorities. The key is understanding which clauses are low-risk, and which only look harmless. Legal input helps you draw that line confidently.
Prepare your story and vision
Strong negotiation starts with a strong narrative. Founders who can clearly communicate their business model, growth plan and exit strategy are far more likely to earn investor trust, and more room to shape the terms of the deal.
Be prepared to answer:
- How will this funding accelerate growth?
- What milestones are you targeting?
- What does long-term success look like?
This isn’t just about pitching; it’s about aligning your vision with your legal position. When you explain why you need flexible future fundraising terms or founder-friendly governance, it’s easier to secure them.
Legal advisors can help you refine your story to anticipate investor concerns, strengthen your commercial rationale, and ensure your term sheet reflects the way you want to build your business.
Stay calm and don’t rush the process
The pressure to sign quickly is real. Investors may set tight deadlines, hint at limited availability, or say the deal will fall through if not accepted promptly. But rushing to sign a term sheet can leave you exposed to long-term risks that are difficult (or impossible) to unwind.
Even if the headline terms look reasonable, hidden clauses in the fine print can affect control, dilution, and even your ability to raise further capital. Once signed, the term sheet sets the tone for the entire investment and in many cases, becomes the blueprint for your shareholders’ agreement.
Taking the time to understand what you’re signing isn’t a delay, it’s a safeguard. And having legal advice at this stage helps you move at the right speed, not just the fastest one.
Why legal advice early on is essential
The best time to involve a lawyer is not after you’ve agreed the deal, it’s before the negotiations begin. If you’ve received a term sheet and you’re not sure what to do next, our article will take you through the process.
Experienced startup lawyers do more than just explain the language. They help you:
- Spot hidden risks in investor-friendly clauses
- Negotiate strategically, using industry benchmarks
- Save time and cost by avoiding renegotiation or drawn-out legal disputes down the line
When your legal and commercial strategies are aligned, you're in a far better position to build the company you’ve envisioned, not just the one your term sheet allows. A lawyer will also help you navigate potential warning signs in term sheets, which we talk about in our term sheet red flags article.
Bringing a legal team on board at this stage can also save time when it comes to building out your startup for the next stage, and all the documents that go hand-in-hand with success.
To gain practical tips for preparing for your pre-seed or seed round, watch our free webinar. If you need legal advice for your funding round, simply fill out the form below with your enquiry, and a member of our team will get in touch with you.
