A term sheet is a mostly non-binding document that outlines the key terms of an investment between a Swiss startup and its investors. Although generally not enforceable, it forms the foundation for every later agreement in a financing round — including the Investment Agreement and the Shareholders’ Agreement. Negotiating the right terms upfront is what keeps founders and investors aligned through closing.
TL;DR
- A term sheet is usually non-binding but forms the basis for all later agreements in a financing round
- Always negotiate a term sheet that includes all key terms from the start
- Book a free call with us
What is a term sheet?
A term sheet is a mostly non-binding document between a company and its investors outlining the key terms and conditions of an investment.
Although it is generally not enforceable, it plays a crucial role in structuring the negotiation and aligning expectations early on.
It forms the foundation for the Investment Agreement and the Shareholders’ Agreement (SHA) .
Term sheet governance clauses
Board representation
- Decide whether investors receive board seats (individual or shared representation)
- Common practice: lead investor appoints one board member
- This increases accountability and alignment
- Avoid board observer roles as they often reduce engagement
Veto rights
Board level
- Investors may require approval rights for “Important Board Matters”
- In practice, investors rarely block decisions unless strongly justified
Shareholder level
Investors may receive veto rights despite holding smaller stakes. Typical veto topics include:
- Change of company purpose
- Relocation outside Switzerland
- Changes to share class rights
Information rights
- Investors expect structured reporting and transparency
- Strong reporting capabilities are a key differentiator for startups
- In some cases, mechanisms like purchase options are used to manage conflicts (e.g. investor competing with the company)
Money clauses: valuation and investor protection
Valuation
Understanding pre-money vs post-money valuation is critical, as it determines how many shares investors receive.
Read more about pre-money vs post-money valuation.
Protection
Liquidation preference
- Investors with preferred shares are paid first in exit scenarios
- Structured as a waterfall: others are paid only after investors are satisfied
For a deeper explanation, see our introduction to liquidation preference.
Anti-dilution
- New financing rounds dilute ownership percentages
- Shareholders usually have subscription rights to maintain their stake
- Additional anti-dilution protections may apply in down rounds
Transfer restrictions
For a full breakdown, see our deep-dive on transfer restrictions in Swiss financing rounds.
Right of first refusal
- Shares must first be offered to existing shareholders before third parties
Purchase option
- Used to penalise bad leavers or control ownership structure
- Can also apply in cases like death of a shareholder
- Pricing depends on the event (fair market value vs nominal value)
Tag-along
- Protects minority shareholders
- Allows them to join a sale on the same terms
Drag-along
- Protects majority shareholders
- Allows forcing minority shareholders to sell in a full exit
Founder vesting
Founders must be incentivised to stay and avoid dead equity. If a founder leaves early, part of their shares may be forfeited.
Typical structure:
- 12 months vesting credit at closing
- Remaining vesting over 36 months
- Avoid dead equity through vesting and purchase options
- Negotiate liquidation preference early in the term sheet
- Grant a board seat to the lead investor
- Implement transfer restrictions in the Shareholders’ Agreement
How to negotiate a term sheet with investors
The term sheet is the starting point of negotiations and should include all key terms upfront.
As the process moves forward, negotiation power typically shifts toward investors. A well-structured term sheet helps maintain balance and prevents misalignment. If you want experienced support, see how LEXR’s seed funding legal team guides Swiss founders from term sheet to closing.
FAQs
Is a term sheet legally binding?
A term sheet is mostly non-binding. It outlines key terms and conditions of an investment but is generally not enforceable. Despite this, it plays a crucial role in structuring negotiations and aligning expectations early.
How does a term sheet relate to the Investment Agreement and the Shareholders’ Agreement?
The term sheet forms the foundation for the Investment Agreement and the Shareholders’ Agreement (SHA). It is the basis for all later agreements in a financing round.
What are typical investor veto rights at shareholder level?
Investors may receive veto rights despite holding smaller stakes. Typical veto topics include change of company purpose, relocation outside Switzerland, and changes to share class rights.
What is a liquidation preference?
A liquidation preference means investors with preferred shares are paid first in exit scenarios. It is structured as a waterfall: other shareholders are paid only after investors are satisfied.
What is the difference between drag-along and tag-along rights?
Tag-along protects minority shareholders by allowing them to join a sale on the same terms. Drag-along protects majority shareholders by allowing them to force minority shareholders to sell in a full exit.
What is a typical founder vesting structure?
A typical structure is 12 months of vesting credit at closing, with the remaining shares vesting over 36 months. Vesting incentivises founders to stay and helps avoid dead equity if a founder leaves early.
How do I get this done?
- Generate a term sheet with our free term sheet generator
- Use the Term Sheet Clinic for a free expert review
- Book a free call with our team
