What Is A Founders Term Sheet?

When you’re launching a startup with co-founders, it’s easy to jump straight into building the product and talking to customers. But before you invest too much time and money, it’s smart to agree the big-picture terms between founders in a short, plain-English document. That document is a founders term sheet.

A founders term sheet helps you align on ownership, roles, decision-making and what happens if someone leaves - early, simply and without getting lost in legal wording. It’s the stepping stone that guides your lawyers when drafting the full suite of binding documents later.

In this guide, we’ll explain what a term sheet is, when to use it, what it should include, how it works in Australia, and the typical next steps to formalise your startup structure. Our goal is to make this feel manageable, so you can move forward confidently with your co-founders.

What Is A Founders Term Sheet?

A founders term sheet is a short document that records the key commercial terms agreed between the startup’s founders. Think of it as the “handshake” written down - a clear summary of who owns what, who does what, how decisions are made, and how you’ll deal with common founder scenarios.

Most founders treat a term sheet as largely non-binding (a guide for later contracts). However, some clauses - like confidentiality or exclusivity - can be drafted to be binding. Either way, the purpose is the same: give everyone clarity early and reduce the risk of misunderstandings down the track.

It’s common to use a Term Sheet before you pay to draft longer agreements. This way, you align quickly and keep momentum, while making sure you’re thinking through the critical “what ifs.”

Why Use A Term Sheet Before A Shareholders Agreement?

Could you skip straight to a Shareholders Agreement? You could - but a term sheet first is faster and cheaper. It helps you test alignment before investing in detailed legal drafting.

Here’s why founders prefer the term sheet first:

• Speed and clarity: You can agree high-level terms in hours, not weeks.
• Cost control: Lock down the business deal before paying for longer contracts.
• Focus: It forces the right conversations about equity, roles and leaver scenarios early.
• Foundation for drafting: Lawyers can convert the term sheet into a tailored Shareholders Agreement efficiently.

In short, a term sheet helps you avoid surprises. If you discover a big misalignment, it’s much easier to fix at this stage than after you’ve issued shares, hired staff or taken investment.

What Should A Founders Term Sheet Include?

There’s no one-size-fits-all, but strong founder term sheets typically cover the following topics. Keep the language simple and focus on the commercial deal you want captured in later documents.

Ownership And Capital Structure

Record the initial cap table: how many shares or percentages each founder will hold at completion. Note any planned option pool (e.g. 10% for future hires). If founders will receive equity over time, flag vesting (more below).

Also consider whether you’ll set up a company now or later. Many startups incorporate at term sheet stage so there’s a clean entity to hold IP and issue shares. If you are ready, you can proceed with a straightforward Company Set Up and then issue founder shares in line with your term sheet.

Vesting And Cliff

Vesting ties a founder’s equity to their continued contribution. A common structure is four years’ vesting with a one-year cliff - nothing vests if a founder leaves within the first year, then equity vests monthly or quarterly after that. Record the vesting schedule and any acceleration (e.g. partial acceleration on change of control).

Later, vesting terms can be implemented using a Share Vesting Agreement or options under an employee plan (see below).

Roles, Responsibilities And Time Commitment

Outline who will act as CEO, CTO, COO, etc., and the expected hours each founder will commit. If a founder is part-time initially, note any milestones or a plan to go full-time. Clear expectations reduce tension later.

Decision-Making And Governance

Decide how day-to-day and major decisions will be made. For example, day-to-day decisions by the CEO; major decisions (issuing shares, taking on debt, selling the company) require board or shareholder approval.

Capture any founder veto rights, minimum board composition, and how deadlocks will be resolved. These become the backbone of formal governance clauses in your Shareholders Agreement.

Cash, IP And Other Contributions

Record who is contributing cash, assets, or key relationships, and whether those contributions affect equity or are reimbursable later. Critically, agree that all startup intellectual property (code, designs, brand) is owned by the company, not the individuals.

Founders should agree to assign all IP created for the business to the company and to keep information confidential. If you need to share sensitive information with third parties early, put a simple Non-Disclosure Agreement in place.

Leaver Provisions (Good Leaver vs Bad Leaver)

Founders leave - it’s normal. Plan for it. A “bad leaver” might be someone who resigns early to join a competitor; a “good leaver” might be someone who leaves due to illness. Your term sheet should define each category and what happens to unvested and vested shares.

Often, unvested shares are forfeited and vested shares may be subject to buy-back at a pre-agreed price (e.g. fair market value for good leavers, cost for bad leavers). Clear leaver terms protect the team and the cap table.

Pre-Emption, Transfers And Exit

Decide whether existing shareholders get first rights to buy any shares offered for sale (pre-emption), and whether founder shares will be subject to transfer restrictions for a period. Flag any expectations about dividends, drag-along or tag-along rights for future exits - even a sentence or two helps guide the legal drafting later.

Fundraising Basics

If you plan to raise capital, include your target timing and the high-level structure you expect (for example, an equity round using a Share Subscription Agreement). You don’t need full detail now - just capture the intent so founders are aligned on the path to funding.

Milestones And Timelines

Note key dates, like when the company will be incorporated, when shares will be issued, and deadlines for executing long-form documents. You might also include simple performance milestones (e.g. product launch date, first five paying customers) to keep the team on track.

Binding Clauses (If Any)

Most founder term sheets are non-binding, except for specific clauses such as confidentiality or exclusivity. If you want anything to be binding now, label it clearly and keep it narrow. The rest can be expressed as “subject to execution of definitive agreements.”

How Do Term Sheets Work In Australia?

Practically, a term sheet is a commercial document that will be followed by legal contracts. Here are the key points to understand in the Australian context.

Non-Binding vs Binding

Term sheets are commonly non-binding for the commercial terms; courts treat them as an agreement to agree later. However, specific clauses (confidentiality, good faith, exclusivity, governing law) can be binding if drafted that way. If you intend some clauses to be binding, say so explicitly in the document.

Good Faith And Conduct

While “good faith” is a nuanced legal concept, it’s sensible to include a short statement that the founders will negotiate the long-form documents in good faith. It sets the tone and reduces scope for gamesmanship during drafting.

Execution Formalities

You can sign a term sheet electronically or in wet ink. If you’ve already incorporated, it’s often best to sign in accordance with company execution rules, such as signing under section 127 of the Corporations Act. This avoids questions later about whether the company is bound by any binding clauses.

Plain English And Practicality

Keep the term sheet readable. Two to five pages is typical. Use bullet points. Avoid legalese where you can - save the heavy lifting for the Shareholders Agreement and related contracts. The goal is clarity and alignment.

Step-By-Step: How To Create A Founders Term Sheet

If you’re ready to put your agreement in writing, here’s a simple roadmap.

1) Align On The Big Questions

Schedule a founder session to discuss equity split, roles, vesting, decision-making and leaver scenarios. Treat it like a structured workshop. It can help to start from a default (for example, equal split with vesting) and adjust based on time commitment, cash contribution and prior IP.

2) Draft The Term Sheet

Use a concise structure with clear headings. Capture the points listed earlier and highlight any binding clauses. If you’re unsure whether something should be binding now, leave it non-binding and flag it for inclusion in the long-form documents.

3) Incorporate And Issue Founder Shares

If you haven’t already, incorporate the company and open the cap table. Record each founder’s shareholding, vesting terms and any agreed option pool. If timing is tight, you can complete incorporation first and issue shares immediately after in line with your term sheet. A clean Company Set Up now saves headaches later.

4) Implement Vesting Or Options

Once the company exists, implement the vesting terms via a Share Vesting Agreement or, if appropriate, set aside options for founders or early hires under an employee plan. (If you’re heading down an options path for staff, you’ll later consider an Employee Share Option Plan.)

5) Move To Long-Form Documents

Ask your lawyer to convert the term sheet into the key agreements, including a Shareholders Agreement, founder IP assignments, and any confidentiality undertakings. This is where the details live - like transfer restrictions, dispute resolution process and comprehensive governance rules.

6) Keep Your Documents In Sync

As the business evolves, update your term sheet (for internal reference) and ensure the long-form agreements reflect any changes, especially after a funding round or major team change. Consistency across documents avoids confusion and potential disputes.

What Comes Next After The Term Sheet?

Once you’ve agreed the high-level terms, you’ll formalise them through a suite of contracts and company documents. Every startup is different, but the following are common next steps.

• Shareholders Agreement: Governs founder rights, decision-making, share transfers, leaver terms and dispute resolution - the operational rulebook for your company.
• Founder IP Assignment: Assigns all intellectual property created by founders to the company so the IP is owned centrally, not by individuals.
• Share Vesting Agreement or Options: Implements the vesting schedule you agreed in the term sheet; options may later be formalised under an Employee Share Option Plan.
• Company Constitution: Ensures your basic company rules complement the Shareholders Agreement and include any required share terms or restrictions.
• Confidentiality Agreements: Protects sensitive information when dealing with contractors, advisors or potential partners; an Non-Disclosure Agreement is the usual starting point.
• Equity Or Investment Documents: For your first raise, you might use a Share Subscription Agreement to issue new shares to investors, guided by your term sheet’s fundraising section.

It’s also a good time to get your operational legal basics moving - employment contracts for your first hires, website terms and a privacy policy, and any critical supplier or customer agreements. The term sheet sets the founder framework; these documents help the business operate day-to-day.

Practical Tips For A Strong Founders Term Sheet

A few simple habits can make your term sheet more effective and reduce friction later.

• Be specific where it counts: Numbers (percentages, vesting timelines), approvals required for major decisions, and leaver outcomes should be clear.
• Use plain English: Write the terms so any founder can read and understand them without translation.
• Label binding clauses: If confidentiality or exclusivity is binding, say so; otherwise, state the document is non-binding.
• Include timelines: Set dates for incorporation, share issue and execution of long-form documents so momentum isn’t lost.
• Agree a simple dispute pathway: For example, escalate to the board, then mediation before any litigation. It’s a small clause that can save a lot of pain.
• Keep it short: Aim for two to five pages. If you need more detail, it probably belongs in the Shareholders Agreement.

Common Scenarios To Address Early

Every founding team is different, but the same issues come up repeatedly. Tackling them in your term sheet helps avoid future conflict.

• Unequal Time Commitment: If a founder plans to keep a day job, reflect this in equity split or vesting triggers. You can also include milestones (e.g. full-time start date) tied to additional equity.
• Prior IP Or Side Projects: Be clear about what IP is being contributed, and carve out any genuine side projects to avoid later disputes about ownership.
• Buy-Back Funding: If the company can buy back shares from a leaver, note how it will fund that (e.g. over time, or using retained earnings), and the valuation approach (simple formulas at this stage are fine).
• Board Composition: Decide how many directors you’ll have now and after a seed round, and whether any investors will have the right to appoint a director.
• Future Employee Equity: If you want an option pool, record the size and whether it’s carved out before or after any new investment.

Key Takeaways

• A founders term sheet is a short, usually non-binding document that captures the core deal between co-founders before longer contracts are drafted.
• Use it to agree equity, vesting, roles, decision-making, leaver outcomes, IP ownership and fundraising intentions at a high level.
• Keep it plain-English, two to five pages, and label any binding clauses like confidentiality or exclusivity.
• After alignment, incorporate the company, issue founder equity, and convert the term sheet into a Shareholders Agreement and related documents.
• Implement vesting via a Share Vesting Agreement or options, protect IP with assignments and NDAs, and prepare for future funding with a Share Subscription Agreement.
• Clarity now prevents disputes later - a clear term sheet sets your startup up for smoother governance, investment and growth.

If you’d like a consultation on preparing or reviewing a founders term sheet and next steps for your startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.