What to Know Before Signing a Term Sheet

The document that defines your company's future

A term sheet is often described as non-binding, and in a narrow legal sense this is accurate for most of its provisions. But in practice, a signed term sheet creates powerful economic and psychological commitments that make it extraordinarily difficult to renegotiate terms once both parties have signalled agreement. In our experience advising founders through more than 80 fundraising processes across African markets, the decisions made at the term sheet stage account for more than 90 percent of the economic and governance outcomes that ultimately appear in the final definitive agreements. The time to negotiate is before you sign, not after.

For African founders, term sheet negotiation carries additional layers of complexity that founders in Silicon Valley or London rarely encounter. The interplay between Delaware corporate law and African operating company structures, the implications of foreign exchange controls on capital deployment timelines, the enforceability of certain governance provisions across multiple jurisdictions, and the specific requirements of development finance institutions that co-invest alongside traditional venture capital all create negotiation dynamics that demand specialised knowledge and careful preparation.

Valuation is a headline, not a deal

The most common mistake first-time founders make is fixating on the pre-money valuation as the primary measure of a term sheet's quality. Valuation matters, but it is only one variable in a complex equation that includes liquidation preferences, anti-dilution provisions, option pool sizing, and participation rights, all of which can dramatically alter the economic outcome for founders even when the headline valuation appears favourable.

Consider a concrete example. A founder receives two term sheets: Offer A proposes a $10 million pre-money valuation with a $3 million investment, 1x non-participating liquidation preference, and a 10 percent option pool created from the pre-money capitalisation. Offer B proposes a $12 million pre-money valuation with a $3 million investment, 1.5x participating liquidation preference, and a 15 percent option pool from pre-money. At first glance, Offer B appears superior because of the higher valuation. But when you model the economics of a $30 million exit, a realistic outcome for many African startups, the participating preference in Offer B means the investor receives their 1.5x preference plus their pro rata share of remaining proceeds, resulting in substantially lower founder returns than Offer A despite the higher headline valuation. The option pool difference further dilutes the founder's effective ownership. In our analysis, Offer A delivers approximately 20 percent more to founders at a $30 million exit than Offer B, despite the lower stated valuation.

Anti-dilution provisions deserve equally careful scrutiny, as they determine what happens to the investor's ownership percentage if the company raises a subsequent round at a lower valuation, a scenario that is increasingly common in African markets given macroeconomic volatility. The two standard anti-dilution mechanisms are full ratchet and weighted average. Full ratchet adjusts the investor's conversion price to the price of the down round, regardless of how small the down round is, which can result in massive dilution to founders. Weighted average, which accounts for the relative size of the down round, is far more founder-friendly and is the market standard globally. Yet in our experience, approximately 20 percent of term sheets presented to African founders at Series A still include full ratchet anti-dilution, often justified by investors as compensation for the perceived higher risk of African markets. Founders should insist on broad-based weighted average anti-dilution as a non-negotiable term. The option pool is another area where founders frequently lose value without realising it. Investors typically require that an option pool be created or increased from the pre-money capitalisation before their investment closes, which means the dilution from the option pool falls entirely on existing shareholders rather than being shared with the new investor. A 15 percent option pool carved from pre-money on a $10 million valuation effectively reduces the pre-money to $8.5 million in economic terms. Founders should negotiate the option pool size based on a realistic eighteen-month hiring plan and resist pressure to create pools larger than what the plan justifies, as excess options represent unnecessary dilution that benefits no one until they are granted.

The governance provisions that matter most

Beyond economics, the governance provisions in a term sheet determine who controls key decisions about the company's direction, and these provisions tend to accumulate across funding rounds in ways that can progressively constrain founder autonomy. The critical governance terms to scrutinise include board composition and voting rights, protective provisions requiring investor consent, information rights, and drag-along and tag-along provisions.

Board composition deserves particular attention. A standard early-stage configuration gives founders two board seats, the investor one seat, and optionally one independent seat. This structure preserves founder control while giving the investor visibility and voice. However, some term sheets, particularly from DFIs and corporate venture arms active in African markets, request two investor board seats at the seed or Series A stage, or require that the independent director be mutually approved, giving the investor an effective veto over the appointment. By Series B, if each new lead investor receives a board seat, founders can find themselves in a minority position on their own board. The negotiation principle is straightforward: guard board composition jealously at early stages because the precedent set in your first institutional round will be the starting position for every subsequent negotiation.

Protective provisions, sometimes called veto rights or consent rights, enumerate the actions the company cannot take without investor approval. Standard protective provisions include issuing new shares, taking on debt above a specified threshold, changing the company's articles of incorporation, and selling the company. These are reasonable and expected. However, some term sheets include expansive protective provisions that require investor consent for annual budgets, individual expenditures above a low threshold such as $25,000, hiring or terminating senior executives, entering new markets, or changing the business model. In our experience, approximately 35 percent of term sheets presented to African founders at the seed and Series A stage contain at least two protective provisions that would be considered non-standard by Silicon Valley norms. Founders should push back firmly on any protective provision that would require investor consent for routine operational decisions, as these provisions create governance friction that slows execution and can become tools of investor control in adversarial situations.

Information rights and drag-along provisions are two areas where founders frequently accept standard language without appreciating the operational burden or strategic implications. Information rights typically require the company to provide investors with monthly or quarterly financial statements, annual budgets, and access to books and records. Whilst reasonable in principle, the specific requirements matter enormously: a term sheet that requires audited quarterly financials creates a compliance burden of $40,000-$80,000 annually that early-stage African companies can ill afford, whereas unaudited quarterly management accounts with annual audited statements represent a more proportionate standard. Founders should also negotiate a clear confidentiality framework around information rights, as investor-received financials that leak to competitors or potential acquirers can cause significant commercial harm. Drag-along provisions, which allow a specified majority of shareholders to force all shareholders to accept a sale of the company, deserve particular attention in the African context because exit markets remain illiquid and the range of plausible exit outcomes is wider than in more mature ecosystems. The critical variables are the threshold required to trigger the drag-along, typically 50-75 percent of shareholders, and whether there is a minimum price or return threshold that must be met before the drag can be exercised. We strongly recommend that founders negotiate a minimum return floor on drag-along provisions, such as a requirement that the drag cannot be exercised unless the sale price delivers at least a 2x return on total invested capital, which prevents investors from forcing a fire sale in situations where they may have different time horizons or portfolio pressures than the founder.

Africa-specific term sheet considerations

Several term sheet provisions carry unique implications in the African context that founders must understand before signing. Currency denomination clauses determine whether the investment amount, valuation, and liquidation preferences are denominated in dollars or local currency. In markets with volatile currencies, this distinction can be worth millions of dollars over the life of the investment. Most institutional investors in African startups denominate in dollars, but founders should ensure the term sheet explicitly states the currency and the applicable exchange rate for any conversion requirements.

Conditions precedent clauses in African term sheets tend to be more extensive than their global counterparts. Beyond standard due diligence and legal documentation, investors may require completion of a corporate restructuring such as a Delaware flip, resolution of outstanding tax liabilities across all operating jurisdictions, completion of data protection compliance audits, and evidence of all regulatory licences. These conditions can take 3 to 6 months to satisfy, during which the company is operating in a twilight zone where it has committed to the investor but has not yet received capital. Founders should negotiate a realistic timeline for satisfying conditions precedent and, critically, ensure that the term sheet includes a commitment from the investor to fund a bridge or advance a portion of the investment to cover restructuring costs if the conditions precedent require significant expenditure.

The selection of legal counsel for term sheet negotiation is itself a strategic decision that African founders often underestimate. The ideal legal adviser for an African startup fundraise combines three capabilities: deep expertise in Delaware or English corporate law depending on the holding company jurisdiction, practical familiarity with the venture capital term sheet landscape and investor norms, and understanding of the regulatory requirements in the company's African operating markets. In our experience, the most effective approach is to engage a specialist venture capital law firm for the holding company transaction, typically costing $15,000-$40,000 for a Series A, supplemented by local counsel in each operating jurisdiction for regulatory opinions and local corporate filings. Founders should be wary of generalist corporate lawyers who may be excellent in commercial law but lack the specific pattern recognition that comes from reviewing dozens of venture term sheets annually. Equally important is the negotiation process itself: founders who present a clear, well-organised response to the term sheet within five to seven business days, addressing each provision with specific alternative language rather than vague objections, demonstrate the kind of commercial sophistication that builds investor confidence. We advise founders to categorise their term sheet comments into three tiers: non-negotiable items where the founder will walk away if the term is not changed, important items where the founder has a strong preference but is willing to compromise, and nice-to-have items that can be conceded as part of the overall package. This tiered approach prevents the negotiation from becoming a war of attrition over every provision and signals to the investor that the founder is a pragmatic partner rather than an adversarial counterparty.

The bottom line

A term sheet is not just a financial document. It is the constitution of the relationship between founders and investors, and like any constitution, its provisions will be interpreted and applied in ways that the drafters may not fully anticipate at the time of signing. The founders who approach term sheet negotiation with rigour, informed by an understanding of both the standard venture capital framework and the specific complexities of building across African jurisdictions, are the ones who preserve the most value and the most control over the trajectory of their companies. Invest in experienced legal counsel, model the economics under multiple exit scenarios, and never let the urgency of closing a round override the discipline of understanding what you are agreeing to.