What Terms Should I Include in a Capital Raising Term Sheet?

For example, the term sheet may specify that day-to-day operational decisions shall be made by the company’s board of directors by ‘ordinary resolution’, being a resolution approved by more than 50% of the directors entitled to vote.

For example, the term sheet may include an obligation on the company to provide audited financial statements to investors within 120 days after the end of each financial year.

3. Shareholder Rights and Protections

As noted above, the term sheet should ideally include a list of items requiring shareholder approval. For example, the term sheet may specify that disposing of the company’s key assets, such as its intellectual property, must be approved by shareholders holding at least 75% of the company’s shares.

Term sheets often include general and minority shareholder protections such as pre-emptive rights, which give existing shareholders the right to maintain their percentage ownership in future funding rounds. 

Another common minority protection is the ‘tag along’ right. Tag-along rights are provisions that allow minority shareholders to join in on a sale of shares by a majority shareholder, ensuring they can sell their shares on the same terms. This protects minority shareholders by giving them the option to sell their stake if the majority decides to sell theirs.

4.  Founder Restrictions

In early-stage companies, investors often require vesting provisions for founder shares to ensure that the founders remain committed to the company over time. These provisions typically require the founders to earn their shares gradually, aligning their interests with the long-term success of the business.

Founder lock-ups are another common provision, which restricts the founders from selling their shares (or a portion of them) for a specified period after the funding round. This helps maintain stability and ensures that the founders remain invested in the company’s growth. Moreover, this provision prevents them from exiting too early and potentially destabilising the business. 

5. Other Standard Terms

Other standard provisions in a term sheet may include: 

• confidentiality clauses to protect sensitive information exchanged during negotiations; 
• an exclusivity period during which the company agrees not to seek investment from, or negotiate with, other parties;
• any conditions that must be satisfied before the investment is finalised, such as the investor being satisfied with the results of its due diligence investigations in relation to the company;
• whether the company is required to reimburse the investor for a portion of its costs (such as legal fees incurred during negotiations up to a maximum amount);  
• the date by which the funding round is expected to conclude; 
• the laws that will govern the term sheet and the long-form transaction documents; and 
• the dispute resolution procedures that must be followed in the event a dispute between the parties arises. 

6. Binding Terms within Non-Binding Term Sheet

While parties often intend for the term sheet to be non-binding, they may want certain provisions to be legally enforceable. For this reason, the term sheet should clearly state which provisions are intended to be legally binding and which are non-binding. Commonly binding provisions may include clauses relating to: 

• Exclusivity; 
• Confidentiality; 
• Costs; 
• Dispute resolution 
• Governing law. 

Key Takeaways

The primary purpose of the term sheet is to outline the key terms and conditions that will serve as the foundation for more detailed legal agreements. These initial terms provide clarity and set expectations between the parties involved, ensuring alignment before proceeding to the more complex legal documentation. Therefore, it is crucial to tailor the term sheet to your unique circumstances and safeguard your interests.

By Ericsson Yu - Lawyer
30 June 2025
legalvision.com.au