How UK term sheets work: the clauses founders should understand before signing

A term sheet is a short document, usually two to six pages, that sets out the proposed terms of a funding round before the full legal documents (the investment agreement, articles of association and disclosure letter) are drafted. Most of a term sheet’s substance sits in a small number of clauses covering valuation, liquidation preference, anti-dilution protection, vesting and a handful of investor rights, and understanding what each of these actually does is worth far more to a founder than reading every line. This guide is a general explainer of how these clauses commonly work in the UK market; it is not a substitute for advice from a solicitor who has actually read your term sheet.

Is a term sheet legally binding?

Mostly not, though parts of it usually are. The commercial terms, valuation, the amount being raised and the investor’s proposed rights are typically expressed as non-binding, meaning either side can walk away before the final legal documents are signed, but term sheets commonly carry a small number of binding clauses regardless: confidentiality, exclusivity (sometimes called a “no-shop” clause, which stops a founder running a competing process for an agreed period) and, occasionally, a break fee if the founder pulls out after signing. It is worth reading a term sheet with this split in mind, since agreeing to an exclusivity period is a real commitment even though the headline valuation is not.

What do pre-money and post-money valuation actually mean?

Pre-money valuation is what the company is deemed worth immediately before the new investment is added, and post-money valuation is simply pre-money plus the new cash raised. If a company is valued at £4 million pre-money and raises £1 million, the post-money valuation is £5 million, and the new investor owns 20% of the company (£1 million of £5 million) once the round closes. Confusion between the two is one of the most common sources of disagreement at term sheet stage, so it is worth confirming explicitly, in writing, which figure any percentage ownership number in a term sheet is being calculated against.

What is a liquidation preference, and why does it matter?

A liquidation preference is a right, usually held by the investor’s new preferred shares, to be paid a set amount from any exit or wind-up before ordinary shareholders, including founders, receive anything. According to HSBC Innovation Banking’s analysis of UK term sheet data, the large majority of UK preference shares, 90% as of 2025, are structured as “1x non-participating”, meaning the investor simply takes whichever is higher of their original investment back or their pro-rata share of the proceeds, rather than taking both. A “participating” preference, by contrast, lets the investor take their preference amount first and then still share in what is left over, which is generally regarded as less founder-friendly, and the same HSBC analysis found 96% of UK non-participating preference shares carried a straightforward 1x multiple rather than a higher multiple. It is worth treating any multiple above 1x, or any participating structure, as a term to push back on or at least fully understand the consequences of before agreeing.

What is anti-dilution protection?

Anti-dilution protection adjusts an investor’s effective price per share if the company later raises money at a lower valuation than the current round, commonly called a down round. It only bites in a down-round scenario, so most founders never see it trigger, but the mechanism chosen matters if it does.

Mechanism	How it works	Effect on founders
Full ratchet	The investor’s conversion price is reset entirely to the new, lower price, regardless of how many new shares are issued	Most punitive for founders; can cause severe additional dilution in a down round
Broad-based weighted average	A new conversion price is calculated between the old and new price, weighted by the number of new shares issued relative to the existing fully diluted share count	Generally regarded as the market-standard, more balanced approach in the UK
Narrow-based weighted average	Similar calculation to broad-based, but excludes option pool and other fully diluted shares from the weighting	Slightly more punitive for founders than broad-based, less common in the UK

Broad-based weighted average anti-dilution is the most commonly used structure in UK venture rounds, and it is worth treating a request for full ratchet protection as a meaningfully more aggressive term than the market standard.

What is founder vesting, and what are “good leaver” and “bad leaver” provisions?

Founder vesting is a mechanism, commonly requested by an investor at the first institutional round, under which a founder’s shares are earned back over time rather than being fully theirs from day one, protecting the company and other shareholders if a founder leaves early. A common UK structure vests over four years, sometimes with a one-year cliff before which nothing vests, and unvested shares are typically forfeited, or made available for the company to buy back, if a founder departs before the vesting period ends. Leaver provisions then determine what happens to a departing founder’s shares: a “good leaver” (commonly someone who dies, becomes seriously ill, or is dismissed without proper cause) usually keeps or is paid fair value for their shares, while a “bad leaver” (typically someone who resigns without good reason or is dismissed for serious misconduct) may have their shares bought back at a low or nominal value. It is worth having a solicitor check exactly how “good leaver” and “bad leaver” are defined in a specific term sheet, since the definitions vary and materially affect what a departing founder actually walks away with.

What are drag-along and tag-along rights?

Drag-along rights let a defined majority of shareholders (often including the lead investor) force all other shareholders to sell their shares on the same terms if they agree to sell the company, which exists mainly to stop a small minority blocking an otherwise-agreed exit. Tag-along rights work in the other direction, giving minority shareholders the right, though not the obligation, to sell alongside a majority shareholder on the same terms if the majority sells, which is a protection worth having as a founder whose stake may later be smaller than an investor group’s combined holding.

What other clauses commonly turn up?

A term sheet will usually also cover board composition (how many seats the investor gets and whether they can appoint a director), information rights (what financial reporting the investor is entitled to see and how often), pro-rata rights (the investor’s right, but not obligation, to invest further in a future round to maintain their percentage ownership, as covered in more depth by venture firm CRV’s guide to the mechanic), and the size of any option pool being created or topped up as part of the round, which is worth checking carefully since a pool is frequently carved out of existing shareholders’ stakes before the new investor’s money arrives.

The practical takeaway

None of the mechanisms above are inherently unreasonable, and most appear in some form in almost every UK institutional round, so the useful exercise is rarely “should this clause exist” and much more often “is this specific version of the clause within normal market range.” Because term sheets vary in exactly how these clauses are drafted, and because small wording differences can have large financial consequences at exit, it is worth having a solicitor experienced in venture financings review any term sheet before signing, rather than relying on a generic explainer such as this one.