Do I Need A Sydney Lawyer For My Fundraising Term Sheet?

Jess runs a Sydney healthtech startup. After months of investor calls, she finally gets a seed round term sheet for $800,000. The valuation looks good, the investor seems supportive, and everyone is keen to move quickly.

Then she spots a few clauses she isn't sure about: a 1x liquidation preference, founder vesting, a board seat, and a list of conditions that need to be completed before the money lands.

If you're in a similar position, it's completely normal to feel excited and cautious at the same time. A term sheet can set the tone for your company, your control, and your next raise, so it's worth slowing down before you sign.

Do I Need A Lawyer To Review My Fundraising Term Sheet?

Yes, it's usually worth getting a fundraising term sheet review before you sign, even if it's labelled as non-binding.

A startup fundraising term sheet, sometimes called a heads of terms, is often the first written deal document between you and an investor. It usually sets out the commercial terms for an investment, such as valuation, share type, investor rights, board arrangements and key conditions.

Some parts of a term sheet are commonly non-binding, like the proposed valuation or investment amount. Other parts can be binding, such as confidentiality, exclusivity, costs, governing law and sometimes no-shop restrictions. If you sign without checking this carefully, you may limit your ability to speak with other investors or negotiate better terms.

A term sheet lawyer in Sydney can help you separate:

• Commercial points, such as valuation, dilution and investor economics.
• Control points, such as board seats, veto rights and founder vesting.
• Legal points, such as Corporations Act 2001 requirements, ASIC filings and shareholder approvals.
• Future fundraising points, such as whether the terms will make your next round harder.

Good legal review doesn't mean slowing everything down or turning the negotiation into a fight. It means knowing what you're agreeing to, where you can push back, and what should be moved into the long-form investment documents.

What Should A Startup Fundraising Term Sheet Include?

A startup fundraising term sheet should include the main economic, control and process terms for the investment, written clearly enough that everyone understands the deal.

At seed stage in Australia, a term sheet is often short, but it still needs to cover the key points. If it's too vague, you may spend weeks negotiating the same issue again when the share subscription agreement, shareholders agreement or amended constitution is prepared.

Term Sheet Outline To Fill In

Here is a practical outline you can use to check whether the document covers the right areas. This isn't a finished legal document, and a lawyer should tailor it before you use it.

1. Parties: Name your company, including its ACN, and each investor or investment vehicle.
2. Investment Amount: State how much is being invested and whether it's one investor or a group.
3. Valuation: Say whether the valuation is pre-money or post-money, and how the option pool is treated.
4. Share Type: Confirm whether investors receive ordinary shares or preference shares, and summarise the key rights.
5. Use Of Funds: Briefly state what the capital will be used for, such as product development, hiring or marketing.
6. Investor Rights: Set out information rights, board rights, approval rights and future investment rights.
7. Founder Obligations: Cover vesting, good leaver and bad leaver rules, restraint terms and ongoing roles.
8. Conditions Precedent: List what must happen before completion, such as due diligence, approvals and document signing.
9. Completion: State when funds are paid and when shares are issued.
10. Binding Clauses: Identify which parts are binding, such as confidentiality, exclusivity and costs.

The clearer these points are now, the easier it is to avoid surprises later.

How Do Valuation And Dilution Work In A Seed Round Term Sheet?

Valuation and dilution work by deciding how much of your company the investor receives for their investment, so you need to know whether the number is pre-money or post-money.

Pre-money valuation means the value of your company before the investment. Post-money valuation means the value after the investment has been added.

For example, say Jess's Sydney startup agrees to raise $800,000 at a $3.2 million pre-money valuation. The post-money valuation is $4 million. The investor would receive 20% of the company after the round, before allowing for any option pool changes.

But if the term sheet says the company must create a 10% employee option pool before completion, that can change the outcome. The option pool may dilute the founders before the investor comes in, depending on how the clause is drafted.

When reviewing valuation, check:

• Pre-money or post-money: A small wording difference can materially change your dilution.
• Option pool treatment: Is the pool included in the pre-money valuation or added after investment?
• Convertible notes or SAFEs: Will earlier investors convert in this round, and at what discount or valuation cap?
• Fully diluted share capital: Does the calculation include options, warrants, convertible securities and agreed future grants?
• Milestone tranches: Will the investor pay all funds upfront or only after you hit targets?

Valuation isn't just about getting the biggest headline number. A slightly lower valuation with cleaner terms may be better than a high valuation tied to heavy control rights or awkward preferences.

Should I Agree To Preference Shares?

It depends, because preference shares are common in venture capital deals, but the exact rights attached to them can have a big effect on founder outcomes.

Ordinary shares are the simplest structure. They usually rank equally with founder shares and carry the same core rights, unless your Constitution or Shareholders Agreement says otherwise.

Preference shares give investors special rights. In a seed round term sheet in Australia, these may include:

• Liquidation preference: The investor gets paid before ordinary shareholders on a sale, winding up or certain exits.
• Conversion rights: Preference shares can convert into ordinary shares, often automatically before an IPO or major sale.
• Anti-dilution rights: The investor gets protection if you issue shares later at a lower valuation.
• Dividend rights: Less common for early startups, but still worth checking.
• Voting or veto rights: The investor may need to approve certain company decisions.

A 1x non-participating liquidation preference is often more founder-friendly than a participating preference. With a non-participating preference, the investor usually chooses between getting their money back first or converting into ordinary shares and sharing in the upside. With a participating preference, they may get their money back first and then also share in the remaining proceeds.

Under the Corporations Act 2001, a company can issue preference shares only if the rights attached to those shares are set out in the company's constitution, or are otherwise approved by special resolution. In practice, a seed round often involves amending the constitution and obtaining the required shareholder approvals before issuing preference shares. If your company is still using a basic setup document from incorporation, it may not be ready for preference shares without amendments.

What Founder Vesting Terms Should I Watch For?

You should watch for vesting terms that let the company or investors claw back too many of your shares if you leave or your role changes.

Founder vesting is common because investors want to know the founding team will stay involved after the investment. The idea is simple: you keep earning your founder equity over time.

A common structure might be four-year vesting with a one-year cliff, but the right position depends on your company's history, how long you've already been building, and how much risk the investors are taking.

Look closely at:

• How much is subject to vesting: Is it all of your shares or only a portion?
• Recognition for past work: If you've spent two years building the business, should some shares already be vested?
• Good leaver rules: What happens if you leave due to illness, redundancy or mutual agreement?
• Bad leaver rules: What conduct triggers a forced sale at a discount or nominal value?
• Acceleration: Do shares vest faster if the company is sold or you're removed after an exit process starts?
• Price on buy-back or transfer: Does the company pay market value, issue price or a lower amount?

For example, if Jess owns 60% before the round and the term sheet says all founder shares re-start on a four-year vesting schedule, she could risk losing a large part of the value she created before the investor arrived. A better position might be to treat part of her holding as already vested, with the balance vesting over time.

This is an area where wording matters. A few lines in a term sheet can become detailed compulsory transfer provisions in the Shareholders Agreement.

What Board Rights And Investor Approvals Are Reasonable?

Reasonable board rights and investor approvals are the ones that protect the investor's major interests without stopping you from running the business day to day.

Investors often ask for a board seat, board observer rights or a list of decisions that need their approval. That can be sensible, especially where they're investing a meaningful amount or bringing strategic value.

The problem is when approval rights are too broad. If you need investor consent for ordinary hiring, routine supplier contracts or everyday product decisions, your business can become hard to manage.

Common approval rights include decisions about:

• Issuing new shares or options.
• Changing the company Constitution.
• Selling major assets or the whole business.
• Taking on significant debt.
• Approving the annual budget.
• Hiring or removing senior executives.
• Changing the nature of the business.

When reviewing these clauses, ask three practical questions:

1. Is the threshold high enough? For example, investor approval for spending over a meaningful dollar amount may be reasonable, but approval for every contract probably isn't.
2. Who has the right? Is it one investor, a majority of preference shareholders, or the board?
3. What happens if they don't respond? You may need a response timeframe so approvals don't sit unanswered.

If you have more than one investor, try to avoid giving too many individual veto rights. Your future self will thank you when you need to move quickly.

What Conditions Precedent Should I Check Before Signing?

You should check whether the conditions precedent are realistic, within your control, and clearly linked to completion of the investment.

Conditions precedent are the things that must happen before the investor is required to complete the deal. They can be sensible housekeeping items, but they can also create uncertainty if they're too broad.

Common conditions include:

• Investor due diligence being completed to their satisfaction.
• All investment documents being agreed and signed.
• Shareholder approvals being obtained.
• Your Constitution being amended to create preference share rights.
• Key employment or contractor agreements being signed.
• IP assignments being completed, especially from founders and developers.
• Privacy policy, data and customer contract issues being cleaned up.
• No material adverse change occurring before completion.

Some conditions are standard. For example, if your company is issuing new shares, you'll need proper corporate approvals and the company register must be updated. ASIC generally needs to be notified of share issue changes within 28 days, commonly through Form 484 for Australian companies.

You should also check whether the raise fits within the fundraising rules in Chapter 6D of the Corporations Act 2001. Many seed rounds rely on exemptions, such as offers to sophisticated investors, professional investors or the small scale offering exemption. The small scale exemption is commonly described as the 20/12/2 rule: personal offers to no more than 20 investors, raising no more than $2 million in any rolling 12-month period.

If your offer structure doesn't fit an exemption, your fundraising terms and conditions may need a disclosure document or a different fundraising path. This is one of the main reasons to get advice before circulating documents widely.

How Should I Negotiate A Term Sheet Without Losing The Deal?

You should negotiate by focusing on the terms that affect control, economics and future fundraising, rather than marking up every sentence.

Most investors expect some negotiation. The key is to be clear, calm and commercial. If you push back on everything, you may lose momentum. If you push back on nothing, you may carry difficult terms for years.

A Practical Review Process

1. Map The Economics: Calculate founder dilution, investor percentage, option pool impact and any convertible security conversion.
2. Separate Binding And Non-Binding Terms: Check whether exclusivity, confidentiality, costs and governing law bind you immediately.
3. Identify Red Flags: Look for participating preferences, broad veto rights, harsh vesting, uncapped legal costs and vague conditions.
4. Check Legal Fit: Confirm the share class, approvals, Constitution changes and Corporations Act fundraising exemption.
5. Choose Your Negotiation Points: Pick the issues that really matter, and explain the business reason for each change.
6. Keep A Clean Paper Trail: Save versions, investor comments and agreed positions so the long-form documents match the deal.

For example, Jess might decide not to argue about monthly investor updates, but push back on a participating liquidation preference and a veto right over all contracts above $10,000. Her counterproposal could be a 1x non-participating preference and investor approval only for contracts outside the approved budget above a higher threshold.

That kind of negotiation is practical. It protects the company without making the investor feel like every issue is a deal-breaker.

Key Takeaways

• A fundraising term sheet can shape your valuation, dilution, control and next raise, even if parts of it are non-binding.
• Check whether the valuation is pre-money or post-money, and how the option pool affects your founder percentage.
• Preference shares are common, but liquidation preferences, anti-dilution rights and veto rights need careful review.
• Founder vesting should recognise the work you've already done and deal fairly with good leaver and bad leaver situations.
• Conditions precedent should be realistic, clear and matched to your legal documents, approvals and ASIC requirements.
• Before signing, make sure your fundraising structure fits the Corporations Act rules or an available exemption.

If you'd like help with reviewing your investment term sheet, negotiating founder-friendly changes, preparing your shareholder documents or checking your fundraising structure, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.