It’s important to know the price of the company, how much the shares cost as most investors will look to 10x their investment. If you are buying in at a pre-money valuation of £100,000,000 in a round of £10,000,000.

That company needs to reach a £1.1 Billion Valuation for you to 10x.

If you’ve already invested, this means that you’re able to top up your investment and double down to protect your % stake in the organisation. Investors make the majority of their returns via this mechanism.

How much is the total amount being raised? How much equity is the company selling? This is typically broken down by investors, both lead and non-lead investors. Most rounds, a Founder will typically dilute between 18-20%. Any higher or lower is sometimes cause for concern. Owning 30% of a business is considered high risk. On the reverse, 10% might be considered too little risk.

How big is the option pool? If the option pool is unassigned, can the founder give themselves more shares if unallocated or continually reward themselves more shares? This is an extremely frowned upon practise as it’s meant to incentivise employees. The Founder already has their shares and the investors would indirectly paying them again.

If a company liquidates, who gets their money back first. When a VC steps in, they usually take a 1x liquidation preference. Aka, they invest £5,000,000. They want just £5,000,000 out. This can sometimes be changed to 1.5x - this is extremely rare and is very aggressive. The justification is that they haven’t had access to that capital and they could’ve made more money.

This is uncommon however, some investors will say they want to be paid out in cash via dividends for providing capital at an agreed payment plan.

When capital is given to a startup and a % of a company is owned. As new money comes in, that % of ownership will decrease. This clause will mean that the % ownership will remain permanent and the other parties will be diluted further.

If secondaries become available (the option to sell your shares prior to an exit via a liquidation event). The investor has the right to buy or sell to other investors before a third-party is introduced. Potentially at a discounted rate.

This prevents founders from continuing to look for better offers if they agree to your term sheet initially.

Who owns how many seats? This is extremely important when it comes to decisions like hiring or firing executives or even the founders. A founder will never want to lose board control or majority however, a fund may want 2 seats if they are injecting a large amount of capital to protect their investment.

How often will the Founder communicate with the investor? Typically this is either on a monthly or quarterly basis. They’re expected to provide honest and real metrics to inform investors of their progress. We want to know how our investments are doing so we can help where possible!

How long until the founder unlocks each chunk of their equity in the business? If I invest £10,000 into the business and they have all their shares - I have no guarantees they’ll stay with the business. They could just quickly sell their shares to someone else. A cliff is a period with no vesting. Back dated vesting refers to the vesting period beginning on a previous date. Typically every round, the vesting period resets to 25% each year for four years (or something similar).

If the company sells, do all of the shares vest immediately. This is typical during an acquisition or IPO. Double trigger refers to them vesting after a year being a “good leaver”. A good leaver means they have continued to be a good employee at the company even after the acquisition.

In the event of a sale or IPO, what % of the voting rights need to agree to the sale for every other investor to be “dragged-along” to sell too, even if they didn’t want to. This is typically 75%. So if 75% of the investors want to sell, everyone has to.

This is a frightening term for Founders. As a fund, I need to get a 10x multiple for my limited partners (LPs). I can include terms that ask for all my money back + 5-10% interest. It’s quite like having a ticking time-bomb however this is usually only much later on in (Series B+ term sheets).

Terms referring to share conversions can change the type of shares from one type to another. This is important because not all shares are viewed the same. Ordinary shares is the most typical (especially at Pre-seed -> Series A). We suggest reading this article if you want more details on share classes.