Term sheet: the clauses every founder must understand

The term sheet is the document in which an investor puts in writing the terms on which they intend to come into the capital. In most of its parts it is not yet binding, but it sets the economic and governance framework on which the articles of association and the shareholders’ agreement will be built. Signing it without understanding it is the most expensive mistake a founder can make: what you accept here comes back to you, multiplied, at the next round and at the exit.

The economic clauses

The first block concerns how much the company is worth and how much comes in.

Pre- and post-money valuation: the pre-money valuation plus the investment give the post-money. If you raise CHF 1m on a pre-money of CHF 4m, the investor takes 20% (1 out of 5). A common mistake is to reason on the pre-money when the percentage is calculated on the post-money.
Option pool (ESOP): the investor often asks that the employee pool be created before the round, i.e. diluting only the founders. Always ask whether the pool is calculated pre- or post-money: it shifts real percentage points.
Liquidation preference: this defines who gets paid first in the event of a sale or liquidation. A “1x non-participating” preference returns to the investor either the capital paid in or their pro-rata share, whichever is greater. The “participating” versions (first the capital, then also the share) are far more aggressive and must be negotiated.

The anti-dilution clauses

Anti-dilution protects the investor if a future round takes place at a lower valuation (a down round). The weighted average formula is the balanced standard. The full ratchet version, which reprices the whole entry at the new lower price, is very punishing for founders and should be avoided or capped.

Control and governance

This is where it is decided who really calls the shots, often regardless of percentages.

Board composition: how many seats to the founders, how many to the investors, how many to independents.
Veto rights (reserved matters): a list of decisions that require the investor’s consent (new debt, capital increases, sale, key hires). The longer it is, the more your operational freedom is narrowed.
Drag-along and tag-along: the first forces the minority to sell if the majority sells; the second lets the minority join the sale on the same terms.

Founders, vesting and exit

Almost always the investor asks for reverse vesting on the founders’ shares: the shares “consolidate” over time (typically 4 years with a 1-year cliff), so anyone who leaves early gives back part of the shares. This is reasonable, but negotiate the duration and the good leaver / bad leaver clauses, which determine the price at which the shares come back.

Watch out too for exclusivity and no-shop: they commit you not to negotiate with other investors for a period. This is normal, but keep it short (30–45 days) so as not to be stuck if the deal stalls.

The Swiss framing

In Switzerland the financing round of an AG or GmbH is carried out through a capital increase resolved in the general meeting and entered in the commercial register, as a rule by public notarial deed. The term sheet anticipates content that will then live in two distinct documents: the articles of association (enforceable against third parties, with constraints on the classes of shares) and the shareholders’ agreement (binding only between the signatories, where vesting, drag/tag and information rights find their place). Understanding what goes where is essential, because not everything written in a term sheet can be entered into the articles.

A practical tip: read every clause asking yourself “what happens at exit?” and “what happens if the next round goes badly?”. These are the two scenarios in which these lines turn into concrete numbers.

How we work

SIH ONE supports founders in reading and negotiating the term sheet, in translating the clauses into the articles of association and the shareholders’ agreement, and in correctly executing the capital increase at the commercial register. If you are about to sign a round, let’s talk with our ventures team.