Welcome to our term sheet guide!
This is where we summarize and explain how we think about the terms that we apply to our investments. There will be updates and amendments to the contents here from time to time.
Before digging into this page, have you read our reasoning behind opening up our term sheet? If not, you can read it here.
“So I’ve read the term sheet, why should I go on reading this guide?”
Sharing our standard term sheet was an easy and obvious decision. However, in that process, we also realized that just sharing the term sheet without any explanations and context wasn’t really that helpful. So this quickly led us to the idea of this page, where we try to explain and give some context to each of the clauses that you find in our term sheet.
This page aims to help founders who are in contact with us (or are thinking about getting in contact with us) understand the reasoning behind our term sheet and what principles are important to us (and why). We do not see our term sheet template as a “first draft”, or “start of negotiations” to be ping-ponged and heavily negotiated.
We have broken out each of the individual clauses in our standard template term sheet (a link to the template term sheet is found below) and included:
- a very short (and non-legalese) explanation of what the clause means. This is included primarily for anyone who may not feel too well-versed in the cryptic lingo of VC funding terms.
- An explanation of why certain clauses are extra important to us and why we have chosen to include this specific clause with this specific wording.
“Something in this guide is hard to understand/poorly explained/wrong!”
We, of course, hope that you find this guide useful and accessible.
However, if you think that a certain explanation is hard to follow or that a certain issue needs more context, we would be super happy to hear your thoughts. The same goes if you have a different opinion about something and want to share.
Thoughts? Just shoot us an email. We may not necessarily agree, but we are always happy to hear your thoughts.
“Where can I find out more? And what is market standard?”
There are many term sheet guides and commentaries out there, some better than others, and many with diverging ideas on different clauses. Our goal here is not to comment on or give pros and cons on all of the myriad of variations of possible clauses that can be included in a term sheet (though a deep dive into at least some of the clauses may be a topic for us to delve into at another time).
Rather this is just what we think is important, and why.
Under at least some of the clauses, you will also find links to some additional reading, explanations, and opinions - some of which have a slightly different outlook compared to ours, but might be helpful to give some additional context or a different perspective.
One of the most often heard arguments for a specific clause is that it’s “market” or “non-market”. While that in itself is a dubious argument at best, following market terms will substantially speed up the process and make it easier to align all investors participating in an investment. Simply put, when reviewing a term sheet focus should always be on the clauses that really matter and/or are non-standard.
Sadly, public tangible market trends and hard statistics concerning deal terms are often hard to find and are often just built from individual experience. Some good initiatives exist, for example, the Mountside Ventures and Landscape VC Term Sheet guide that was launched in 2022.
If you want to read more, here are some general intros and other guides to term sheets are:
- https://www.speedinvest.com/blog/term-sheet-due-diligence
- https://www.linkedin.com/posts/svb-uk_svb-uk-venture-capital-term-sheet-guide-2023-activity-7059829260676419584-tlbE?utm_source=share&utm_medium=member_ios
- https://digify.com/blog/the-startup-founders-ultimate-guide-to-term-sheets/
- https://www.toptal.com/finance/fundraising/common-term-sheet-mistakes-founders-make
1. Valuation and Investment
The clause
A fully diluted post-money valuation of EUR [...] on a fully diluted basis (including ESOP, see below), assuming that (i) any outstanding convertible notes have been converted prior to this financing, and (ii) the Company has no debt.
Total round size of max EUR [...]. Pale blue dot will invest EUR [...] so that Pale blue dot holds at least [...%] post financing on a fully diluted basis. Other investors will invest up to EUR [...] so that such other investors hold up to [...%] post financing on a fully diluted basis.
The short explanation
- Pre-money valuation is how much the company is worth immediately prior to the investment
- Post-money valuation is how much the company is worth immediately after the investment
The longer explanation
Further reading
2. Type of security
The clause
The Company shall issue to the Investors newly issued preferred Series Seed shares (“Seed Shares”) which shall rank senior to all common shares but pari passu with existing preferred shares.
The short explanation
The longer explanation
Further reading
3. Option pool
The clause
The Company shall, in connection with the Investment set up an option pool for employees or increase the existing pool so that the unallocated options represent at least 10% of the fully-diluted post-money capitalization.
The short explanation
The longer explanation
Further reading
4. Closing date
The clause
The parties aim to close the investment within 30 days after the signing of this term sheet.
The short explanation
The longer explanation
5. Liquidation Preference
The clause
Upon an IPO, liquidation, dissolution, winding up, merger, acquisition, sale, exclusive license or other disposals of substantially all of the assets or a majority of the shares of the Company (an “Exit Event”), all holders of Seed Shares shall receive, on a pari passu basis, the higher of: (a) one times the original purchase price for the relative Shares; or (b) the amount they would receive if all shareholders received their pro-rata share of such assets or proceeds.
The short explanation
The longer explanation
Further reading
6. Climate Pledge & ESG Self-assessment
The clause
The Company agrees to take the “Climate Pledge” as well as fill in the Pale blue dot “ESG Self Assessment” document prior to the signing of the investment agreements.
The short explanation
The longer explanation
7. Anti-Dilution
The clause
Seed Shares shall be entitled to a broad-based weighted average adjustment in the event that the Company issues additional equity securities at a price less than the original issue price of the Seed Shares. Standard exceptions apply (esp. ESOP issuances and stock splits).
The short explanation
The longer explanation
Further reading
8. Voting Rights
The clause
Approval of 60% of Seed Shares (“Investor Majority”) required for important measures including: 1. adversely alter the rights of the Seed Shares 2. change the authorized number of shares or issue any new shares or convertible notes beyond those anticipated by this investment 3. create any new class or series senior to or on parity with the Seed Shares 4. increase the number of shares reserved for issuance to employees and consultants, whether under the ESOP or otherwise 5. redeem shares (excluding ESOP-related common shares repurchased upon termination of an officer, employee, director, or consultant) 6. pay or declare dividends or distributions to shareholders 7. effect an Exit Event 8. amend the Articles of the Company 9. purchase or sell shares in another company 10. effect any transaction between the Company and the Founders or their relatives and affiliates 11. assume debt or effect a transaction outside the ordinary course in excess of EUR [..] and 12. Substantially changing or expanding the Company’s business. Investor Director consent required for material board decisions.
The short explanation
The longer explanation
Further reading
9. Financial information
The clause
Pale blue dot will receive: - at least monthly updates as requested with information of basic financial metrics and non-financial information such as runway, revenue, etc (sent to updates@paleblue.vc). - on a quarterly basis; (a) Revenue per quarter, money in the bank, and cost per quarter; (b) Quarterly balance sheet and profit and loss statements; (c) Current estimated "run dry" date (when out of money); (d) The Investors’ current ownership (shares and %); (e) Number of employees (FTE); (f) Number of female executives and/or founders; and (g) Gender (number and %) of employees - at the end of each financial year, annual accounts (audited if possible). - other such information as is reasonably requested by Pale blue dot from time to time (including relevant ESG information and data required for Pale blue dot to comply with its ESG reporting obligations). Pale blue dot to have full inspection rights.
The short explanation
The longer explanation
Further Reading
10. Participation Rights
The clause
Investors will have the right to participate on a pro-rata basis in subsequent issuances of equity securities (including equity-like, e.g. convertible loans).
The short explanation
The longer explanation
Further reading
11. Board
The clause
The Board shall initially be composed of a minimum of 3 members and maximum 5. Pale blue dot shall have the right to appoint a board member or observer if not represented on the board.
The Company shall maintain customary directors’ liability insurance in respect to the activities to be performed by the board.
The short explanation
The longer explanation
Further reading
12. Right of First Refusal and Co-sale
The clause
Shareholders shall have a right of first refusal (“RoFR”) on transfers of any shares of the Company and and a pro-rata right to participate on identical terms in transfers by Founders (subject to customary permitted transfers).
The short explanation
Co-sale (also called tag-along or sometimes piggy back right) means that if a shareholder sells shares, the other shareholders have a right to participate in that sale (normally, this is triggered if the shareholders do not want to utilize their right of first refusal). Co-sale rights can be pro rata (so that each tagging shareholder has a right to sell a portion of its shares) or full (so that each tagging shareholder has a right to sell all its shares).
The longer explanation
Further reading
13. Drag-along
The clause
If a drag-along majority, defined as more than 50.1% of the share capital as well as Investor Majority, wish to accept an offer to sell all of their shares to a third party or enter into another Exit Event, all other shareholders shall be required to sell their shares on the same terms and conditions or to consent to the transaction, subject to the Liquidation Preference of the Seed Shares.
The short explanation
The longer explanation
Further reading
14. Founder Undertakings
The clause
Founders shall enter into customary confidentiality, non-compete, non-solicitation and IP transfer agreements.
Each Founder shall during the vesting period (see below) not sell more than 5% of the shares held by the Founder at the time of the Investment without approval of the Investor Majority.
The short explanation
- your shareholding in the company - including restrictions on selling your shares (sometimes called a “lockup”); and
- your role as the founder and most important person for the operation of the company. Most importantly this means that you are asked to dedicate your working time to the company, that you cannot take up positions or investments in competing activities, and that you agree that any intellectual property that relates to the company belongs to the company and not you personally.
The longer explanation
Further reading
15. Founder Vesting and leaver provisions
The clause
Unless otherwise approved by the Board, 100% of the Founders’ common shares shall be subject to 48 months’ reverse vesting as follows: 25% after 1 year from the date of signing of the investment agreements, followed by monthly vesting in equal installments each month over 36 months. Subject to customary leaver clauses in line with the following principles: In case of a bad leaver event: the Founder shall offer all their shares in the Company for a nominal amount In case of a grey (early voluntary) leaver event: the Founder shall offer all their unvested shares in the Company for a nominal amount and their vested shares for fair market value In case of a good leaver event the Founder shall offer all their unvested and vested shares in the Company for fair market value
The short explanation
For founders who already own their shares, this is implemented through “reverse vesting”, meaning that if the founder leaves the company, the unvested shares will be returned to the company (or alternatively sold to the other shareholders, depending primarily on the laws in the country where the company is set up).
What happens with the vested and unvested shares, and at what price the shares are to be sold/returned depends on the circumstances under which the founder left (if the founder is a “good leaver” or a “bad leaver”).
The longer explanation
Further reading
16. Put option
The clause
Pale blue dot put option exercisable at any time against Founders against payment of nominal value for all shares held by Pale blue dot.
The short explanation
A right for us to, immediately and at any time, sell our shares in the company back to the Founders (free of charge/at minimal cost). It is a pure write-off.
The longer explanation
17. Expenses
The clause
The Company shall pay, at closing, reasonable fees and expenses of Pale blue dot’s which have been incurred by the investment, such as legal counsel (and/or legal work carried out by Pale blue dot), not to exceed [X].
The short explanation
The longer explanation
18. Documentation and Warranties
The clause
Except for the section entitled “Governing law and venue” this term sheet does not constitute a legally binding obligation. Definitive agreements to be drafted by counsel to the Company and to include customary representations and warranties of the Company (capped at the investment amount) and jurisdiction- specific terms where required. Disclosures shall be specific and not against the data room.
The short explanation
- the term sheet is not legally binding.
- we expect your lawyer to “hold the pen” and draft the agreements and any supplementary documents (shareholders’ resolutions etc);
- investors (including us) will ask for certain representations and warranties concerning the company's current status and recent events (on such topics as employees, IP, material agreements, etc). We will, however, not ask you as founders to be personally liable for the warranties made regarding the company.
The longer explanation
Further reading
19. Governing law and venue
The clause
This term sheet and the transaction documents shall be governed by the laws of [the country where the Company is established], save for any of its provisions regarding choice of law. Any dispute arising out of or relating to this term sheet or the transaction documents shall be finally settled by the courts [in the country where the Company is established/arbitration]
The short explanation
- what country’s laws should be used to interpret the term sheet (and the legal agreements that will be based on the term sheet); and
- in what court potential disputes should be settled.
The longer explanation
For quick reference, our full term sheet is found below: