Anatomy of a Term Sheet
A standard European VC term sheet has two distinct halves. The economics section covers everything that touches the cap table directly: pre-money valuation, investment amount, share class, liquidation preference, anti-dilution, dividend rights, option pool top-up, and conversion mechanics. The governance section covers everything that touches control: board composition, protective provisions, information rights, pre-emption rights, drag-along, tag-along, founder vesting, and the no-shop clause.
Most term sheets in the EU run 4–8 pages and are explicitly labelled "non-binding except for confidentiality, exclusivity and expenses." That heading is misleading: the moment you countersign, the deal terms are commercially binding even if not legally enforceable. Investors and founders almost never renegotiate after term sheet signing — the deal closes on substantially the terms you agreed, or it dies.
Read every line. The phrase "subject to definitive documentation" hides the long-form Shareholders Agreement and Articles which can run 80+ pages — that is where the actual mechanics live. If a clause is vague in the term sheet, it almost always resolves in the investor's favour in the long-form drafting.
Economic Terms and Cap Table Impact
Valuation is the headline number but rarely the most important one. A €15M pre-money on €5M raised gives the investor 25% (€5M / €20M post). However, the option pool top-up clause typically requires the pool to sit at 10–15% post-money on a fully-diluted basis — and the top-up comes out of the pre-money, diluting founders before the investor's money arrives. See the [option pool shuffle](/captable/option-pool-shuffle) for the worked math.
Liquidation preference type drives exit economics. 1× non-participating preferred is the European market standard at Seed and Series A; participating preferred is aggressive and should be pushed back hard. The [liquidation preference guide](/captable/liquidation-preference) shows what each variant costs founders at a mid-sized exit.
Anti-dilution type matters in down rounds. Broad-based weighted average is market standard; full ratchet is rare outside distressed deals. See [anti-dilution](/captable/anti-dilution) for the conversion math.
Dividend rights — cumulative or non-cumulative, accruing or paid — are usually a non-issue in early rounds in Europe but become real at Series B+ when growth-equity money arrives. Cumulative accruing dividends at 8% over five years can add 40%+ to the preference amount at exit.
Governance Terms That Bind You
Board composition determines decision-making. A typical Series A board is 3 seats: one founder, one investor, one mutually-agreed independent. Watch for "investor majority" boards or two investor seats with only one founder — these flip control silently. See [board composition and voting control](/captable/board-composition-voting-control) for the dynamics.
Protective provisions are the investor veto list: actions the company cannot take without preferred shareholder consent. Standard reserved matters include issuing new share classes, amending the articles, selling the company, incurring debt above a threshold, and changing the option pool. Over-broad lists paralyse operations — see [protective provisions](/captable/protective-provisions) for the negotiation tactics.
Information rights specify what the investor receives and when. "Major investor" thresholds (typically €500K+) trigger monthly KPI reports, quarterly financials, annual audited accounts and board observer rights for those below the board seat threshold.
Founder vesting is almost always required for any founder not already vested. Standard is 4 years with a 1-year cliff, often with credit for time served. The [vesting schedules guide](/captable/vesting-schedules) covers acceleration provisions.
The No-Shop and the Timeline
The no-shop (exclusivity) clause prevents you from shopping the deal to other investors for a defined period — typically 30–60 days from term sheet signature. This is one of the few legally binding clauses in the document. Breach exposes you to damages claims and immediately kills the deal.
Negotiating tip: keep the no-shop period as short as plausible (30 days is reasonable for a Series A; 45 maximum), and exclude founder employment discussions and existing investor follow-on rights from the scope. Never sign a term sheet with no expiry on the no-shop.
Typical timeline from term sheet to closing is 4–8 weeks. Week 1–2: confirmatory due diligence (legal, financial, technical, commercial). Week 3–5: long-form documentation drafting (SHA, Articles, Subscription Agreement). Week 5–6: signing. Week 6–8: closing conditions (capital call, board resolutions, regulatory filings). If your runway is less than 12 weeks when you start the no-shop, you are negotiating from weakness — the deal will close on whatever terms the investor offers in week 7.
Five Clauses Founders Most Often Miss
1. Pay-to-play. Buried in the protective provisions or anti-dilution section: existing investors who do not participate in a down round lose their preferred status. Looks pro-founder but converts your supportive seed investor into a common holder if they cannot follow on at Series B.
2. Drag-along threshold. The percentage of shareholders required to force a sale. Standard is "majority of preferred + majority of common." Watch for "majority of preferred alone" — that lets investors force a sale below the price you would accept. See [drag-along and tag-along](/captable/drag-along-tag-along).
3. Anti-dilution scope. Standard carve-outs (option pool, conversions, M&A consideration) protect founders. A clause without carve-outs triggers anti-dilution on every new share issuance, not just down rounds.
4. Liquidation preference seniority. "Pari passu with all preferred" is fine. "Senior to all prior preferred" stacks every new round on top of the last and crushes earlier investors and common holders.
5. Founder employment terms. Term sheets sometimes reference founder service agreements with restrictive covenants — non-competes, IP assignments, good leaver / bad leaver definitions. The bad leaver definition can claw back vested equity. See [shareholder agreements](/captable/shareholder-agreements).
When in doubt, model every clause through the [exit waterfall analyzer](/captable/exit-waterfall) at three exit prices (1×, 3×, 10× of invested capital). The clauses that change founder payout most are the ones to negotiate hardest.