Stage 3 · Choose and negotiate financing · Lesson 6 of 6
Reading a term sheet line by line
This lesson is for the day a fund sends you a term sheet, or is about to. It explains the document clause by clause and puts numbers on what two clauses do to your share of a sale, without replacing your lawyer.
Four pages on a Friday evening
Friday, 5pm: four pages, and “a signature on Monday if possible”
The email’s subject line reads “Term sheet, indicative offer”. Attached, four pages in English. In the message, a friendly line: “to move fast, we would like a signature on Monday”. At the top of page one, a single word: non-binding.
We will follow this document at Seheno’s, who runs a cold-chain logistics company in Port Louis (a composite of several files). A regional fund offers her 1 million dollars for 25% of the shares. That values the company at 3 million before the money comes in.
The amount and the valuation are the ones that were discussed. The rest talks about liquidation preference, drag-along, exclusivity and conditions precedent. Two of those lines bind Seheno as soon as she signs. Another will decide what she receives on the day the company is sold.
Two clauses that bind
Two clauses bind you on signature; the others bind what follows
What follows explains words. A term sheet is a legal document: it is read and negotiated with your lawyer, and no sentence in this lesson replaces their view on your own document.
- Amount, valuation, type of shares
- Preference, anti-dilution, vetoes, drag-along
- All of it can still change until the agreement is signed
- Confidentiality
- Exclusivity (the no-shop)
- Sometimes, who pays the costs if talks fail
- The lawyers draft the agreement from this document
- Going back on an accepted line goes down badly
- Later investors often reuse the same terms
Market practice for exclusivity: 30 to 45 days, enough for the investor to complete its checks without you shopping the document (StartupCFO, consulted September 2026).
Two consequences. First, the document deserves a lawyer. For a deal under 10 million dollars, full due diligence costs 25,000 to 50,000 dollars and takes 4 to 8 weeks (2026 market benchmarks). Legal work accounts for 15,000 to 30,000 of that. Having four pages reviewed costs a small part of that.
Second, once exclusivity is signed you stop talking to other investors. Sign it only once you have decided to pause your other conversations, and have it limited in time.
- The document, clause by clause
- Who is paid first
- One clause, four answers
- Three requests, in order
- If it is a loan
- The week before you sign
- In your file
- Your questions for the lawyer
The rest of the lesson
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The words of this lesson
Each word links to its full definition in the glossary.
- Term sheet
- A short letter, before the contract, summarising the investor’s offer: amount, share, conditions.
- Liquidation preference
- The investor takes their money back before the rest is shared.
- Anti-dilution
- An investor protection: if a future round happens at a lower price, they receive a few extra shares.
- Drag-along
- When a buyer wants 100% of the company, the partners holding the threshold set in the clause can oblige the others to sell, on the same terms.
- Tag-along
- When a partner sells its stake, the minority partners can sell theirs alongside it, on the same terms.
- Exclusivity
- You promise not to talk to other investors for a period, while this one checks your file.
- Condition precedent
- A condition written into the agreement: until it is met (a document, an approval), the money is not paid out.
- Preferred shares
- Shares that give the investor rights beyond the other partners: being paid first, voting on certain matters.
- Due diligence
- The investigation the investor runs on you before signing.
- Cap table
- The list of who owns what in your company, in shares and in percentage.
- Tenor
- The time you need: to repay a loan, or for which an investor leaves their money in your company.
- Grace period
- The first months where you pay interest only, not principal.
- Personal guarantee
- You promise to pay yourself if the company cannot. Your house and savings can then be taken.
- Covenant
- A number you promise in the loan contract and must hold to every year.
From the lesson to your file
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