What should a UK seed-stage term sheet include?
By SuLe · Updated 29 June 2026
A UK seed term sheet should cover the economics — investment amount, valuation, option pool and liquidation preference — and the control terms: board seats, investor consent rights, founder vesting and share transfer rules. It should also state which clauses bind (exclusivity, confidentiality, costs) and reflect any SEIS/EIS requirements, leaving the drafting detail to the subscription agreement and articles.
Key facts
- Only exclusivity, confidentiality and costs clauses usually bind — the commercial terms stay "subject to contract".
- A priced round's binding documents are the subscription agreement, the shareholders' agreement and new articles of association.
- SEIS relief is 50% and EIS 30% — share terms that break HMRC's conditions cost your angels that relief.
- SEIS/EIS relief requires full-risk ordinary shares, so angels claiming it generally cannot take shares carrying a liquidation preference.
- English law imposes no general duty to negotiate in good faith (Walford v Miles, 1992) — the term sheet is your real negotiation window.
What economic terms should a seed term sheet fix?
Five numbers and one mechanism: the amount raised, the pre-money valuation, the price per share, the option pool, the liquidation preference — and how a future down round would be handled.
State the investment amount and the pre-money valuation, and make sure both sides run the same arithmetic to the post-money position. Fix the option pool early: its size, and — the expensive detail — whether it is created pre-money (diluting founders alone) or post-money (diluting everyone, investor included).
Then the downside terms. The liquidation preference sets who is paid first on a sale or winding up; any anti-dilution right adjusts the investor's position if a later round prices lower. Each has its own page — at term sheet stage the job is simply to get them stated, understood and modelled.
What control terms will investors ask for?
A say in big decisions, a view of the numbers, and rules about shares changing hands. None of it is exotic — the negotiation is about scope.
Expect a board seat or observer right for the lead investor, plus a list of "reserved matters": decisions — issuing shares, taking on debt, selling the company, changing the articles — that need investor consent. Information rights add regular management accounts and updates.
On shares, the sheet should cover founder vesting (with good and bad leaver terms), pre-emption on new issues, and drag-along and tag-along rights on a sale. Check each against how you will actually run the company week to week, not just against exit scenarios.
Which clauses of a seed term sheet should be binding?
Usually only three: exclusivity, confidentiality and costs. Everything commercial stays "subject to contract" until the long-form documents are signed.
Keep the exclusivity period as short as you can negotiate — you are locked out of the market while the investor diligences, and English law gives you no general good-faith protection if they then walk away (Walford v Miles, 1992). Watch the costs clause too: if you are contributing to the investor's legal fees, cap the amount and try to make it payable only if the round completes.
Everything else — valuation, preference, consents — should be labelled non-binding. That is normal, and investors expect it.
How do SEIS and EIS shape a UK seed term sheet?
If your angels are claiming SEIS (50% relief) or EIS (30%), the term sheet needs to respect HMRC's conditions from the start. Relief lost to careless share terms is among the most expensive drafting errors at seed.
SEIS and EIS money must buy full-risk ordinary shares, so angels claiming relief generally cannot take shares carrying a liquidation preference — a sheet that hands every investor preferred terms can quietly disqualify the angels. Name the share class for each investor group.
Consider making HMRC advance assurance a stated condition and build the application into the timetable. And remember relief arises when shares are issued — sequencing matters if the round mixes a priced tranche with converting ASAs.
| Term | What to pin down at term sheet stage | Where the detail lands |
|---|---|---|
| Investment & valuation | Amount, pre-money valuation, price per share | Subscription agreement |
| Option pool | Size, and pre-money vs post-money creation | Cap table and articles |
| Liquidation preference | Multiple, participating or non-participating | Articles of association |
| Board & consents | Seats, observers, reserved matters list | Shareholders' agreement |
| Founder shares | Vesting schedule, good/bad leaver terms | Shareholders' agreement / articles |
| Binding clauses | Exclusivity period, confidentiality, costs cap | The term sheet itself |
| SEIS/EIS | Who claims, share classes, advance assurance timing | Round timetable and share terms |
Worked example
Bea and Marcus, founders of a developer-tools startup, hold two term sheets for the same £600,000. Fund A offers a £2.4m pre-money valuation with a 1x non-participating liquidation preference — £3m post-money, a 20% stake. Fund B offers £3m pre-money — £3.6m post, a 16.7% stake — but with a 1x participating preference.
They model a £10m sale, leaving the option pool aside for simplicity. Fund B would take its £600,000 back plus 16.7% of the remaining £9.4m — about £2.17m. Fund A would take the higher of £600,000 or 20% of £10m: £2m. The "lower" valuation leaves the founders better off at that exit. The preference, not the headline number, did the work.
Where founders go wrong
Optimising the headline valuation
— a participating preference or a pre-money pool can cost you more than the valuation gap is worth; model exits, not just ownership percentages.Accepting "standard terms" on trust
— there is no single UK standard; every line on the sheet is negotiable until signed.Leaving the option pool vague
— "a pool of sufficient size to be agreed" gets sized against you later; fix the number and where it dilutes now.Treating SEIS/EIS as completion admin
— share classes and scheme conditions belong on the term sheet; angels' 50% or 30% relief depends on them.
Related questions
Is a seed term sheet legally binding?
Mostly not. The commercial terms — valuation, amount, rights — are agreed subject to contract, so either side can still walk away. Exclusivity, confidentiality and costs clauses are usually expressly binding, though, and English law imposes no general duty to negotiate in good faith. [More: What is a term sheet — and is it legally binding?]
Should the option pool come out of pre-money or post-money?
It decides who pays for it. A pool created pre-money dilutes only the existing shareholders — mostly founders — while the investor buys in at the agreed percentage regardless. A pool created post-money dilutes everyone, investor included. Model both versions of the cap table before agreeing the sheet. [More: Should the option pool come out of pre-money or post-money?]
What is a liquidation preference?
The order in which sale or liquidation proceeds are paid out. A 1x non-participating preference lets the investor take back their money or share pro rata, whichever is higher; a participating preference takes both. The detail ends up in your articles of association. [More: What is a liquidation preference?]
What founder protections should I negotiate?
Focus on what you keep: vesting terms you can live with, a fair good and bad leaver split, consent rights limited to genuinely major decisions, and warranty exposure that is capped and sensible. Negotiate these at term sheet stage, while competing investors are still an option. [More: What founder protections should I negotiate in a term sheet?]
Who pays the legal fees in a funding round?
The term sheet's costs clause decides. It says who pays whose legal fees and whether that applies if the round collapses — and it is one of the clauses that is usually expressly binding. Cap any contribution to investor costs and, where possible, make it payable only on completion. [More: Who pays the legal fees in a funding round?]
Term sheets are short precisely because every line carries weight — and the expensive terms rarely look expensive on the page. A SuLe solicitor can benchmark each term and model what it means at your next round and at exit. Book a free term sheet review before you sign, not after.
Keep reading: What is a term sheet — and is it legally binding? · What is a subscription (investment) agreement? · What is a priced round vs a convertible round? · What is a down round and what does it trigger? · Pre-money vs post-money valuation — what's the difference? · Ordinary shares vs preference shares in UK startups — what's the difference?
Primary sources: HMRC — advance assurance for venture capital schemes · Companies Act 2006
