What term sheet means
A term sheet is the deal in two pages before it becomes the deal in eighty.
An investor sets out what they propose: how much they will invest, on what valuation, using what instrument, and with what rights attached. The founders negotiate it. Once signed, the lawyers draft the definitive documents to match.
Most of it is expressly not binding. Either side can walk away, and that is the point: nobody wants to spend money on legal drafting before the commercial shape is agreed.
A small number of clauses do bind, and they should say so. Confidentiality. Exclusivity, meaning the founders will not shop the deal for a stated period. Costs, meaning who pays if it does not complete. Governing law.
The reason a term sheet matters more than its non binding status suggests is commercial. Once signed, its terms are extremely hard to reopen, and everything after it is drafting rather than negotiation.
How it is used
The clauses that decide the economics come first.
Valuation, and whether it is pre money or post money. The difference determines what percentage the investor actually gets, and confusing them is the single most common Nigerian founder error.
The amount and whether it comes in tranches against milestones.
The instrument: ordinary shares, preference shares, a convertible note or a simple agreement for future equity. Each has different consequences for control and for what happens on an exit.
Liquidation preference, meaning who is paid first on a sale and how much before ordinary shareholders see anything. A one times non participating preference is the founder friendly standard.
Then the control clauses. Board composition. Reserved matters, being decisions requiring investor consent. Information rights. Pre emption on new issues. Tag along and drag along rights. Anti dilution protection. Founder vesting, which investors will usually require.
Founders should negotiate valuation, liquidation preference and reserved matters hardest, because those three shape the outcome more than anything else on the page.
Key features
- A short summary of proposed investment terms, agreed before drafting
- Mostly non binding, with confidentiality, exclusivity and costs usually binding
- Sets valuation, amount, instrument and investor rights
- Liquidation preference decides who is paid first on an exit
- Reserved matters define what the company cannot do without investor consent
- Commercially very difficult to reopen once signed
How this works in Nigeria
Nigerian founders raise from a mix of local angels, diaspora investors and foreign funds, and the structures vary accordingly.
Where the investor is foreign, the deal frequently involves a holding company outside Nigeria with the Nigerian company as a subsidiary. That has consequences for tax, for foreign exchange, for repatriating proceeds and for the certificate of capital importation, and those consequences should be understood before the term sheet is signed rather than after.
Certificates of capital importation matter more than founders expect. Foreign investment brought in through authorised channels and documented properly is what allows dividends and exit proceeds to be repatriated through official channels later. Money that arrived informally can be very difficult to take out.
Convertible instruments are common at early stage, and Nigerian founders often underestimate their dilution effect, because conversion happens later at a discount and does not appear on the cap table on the day the money arrives.
Founder vesting will be required by any serious investor, which is another reason to have agreed it between founders beforehand rather than under pressure.
Term sheet vs shareholders agreement vs SAFE
Three documents in a funding round, doing different work.
The term sheet is the summary. Mostly non binding, short, and the place where the commercial negotiation actually happens.
The shareholders agreement is the definitive document. It is binding, it runs to many pages, and it contains the detailed version of everything the term sheet outlined: board rights, reserved matters, transfer restrictions, information rights and exit provisions.
A simple agreement for future equity, or a convertible note, is an instrument rather than an agreement about governance. Money goes in now, shares are issued later on a defined event, usually at a discount to the next round price or subject to a valuation cap. It defers the valuation argument rather than resolving it.
Early stage Nigerian rounds often use a SAFE or note with a very short term sheet. Priced rounds use a full term sheet followed by a shareholders agreement and amended articles.
Limits and risks
Non binding means non binding. An investor can walk away after signing, and founders who stop raising elsewhere because a term sheet was signed have taken a real risk, particularly where exclusivity was granted.
Exclusivity is the clause that hurts most. A ninety day exclusivity given to an investor who then delays leaves a company burning runway with no alternative process.
A term sheet also cannot cover everything, and issues left to the definitive documents can become genuine disputes later, particularly around warranties and founder obligations.
And the summary form hides complexity. A participating liquidation preference with a multiple looks like one line and can consume most of the proceeds of a modest exit.
Worth knowing
Check whether the valuation is pre money or post money, and model the cap table including anything convertible that is already outstanding. Nigerian founders regularly agree a headline valuation and discover afterwards that the percentage they gave away was several points larger than they thought.
Questions people ask
What is a term sheet?
A short document summarising the main terms of a proposed investment, agreed before the full legal documents are drafted. It covers valuation, amount, instrument and the investor's rights.
Is a term sheet binding?
Mostly not. Confidentiality, exclusivity, costs and governing law are usually binding and should say so. The commercial terms are typically non binding until the definitive documents are signed.
What is the difference between pre money and post money valuation?
Pre money is the value of the company before the investment. Post money is pre money plus the investment. The same headline number gives the investor a different percentage depending on which is meant, so confirm it explicitly.
What is a liquidation preference?
The investor's right to be paid first on a sale of the company, up to a stated amount, before ordinary shareholders receive anything. A one times non participating preference is the founder friendly standard.
What are reserved matters?
Decisions the company cannot take without investor consent, such as issuing new shares, taking on debt above a threshold, changing the business or selling the company. They are among the most important terms to negotiate.
What should Nigerian founders watch out for?
Whether the valuation is pre or post money, the liquidation preference structure, the length of exclusivity, the dilution effect of existing convertible instruments, and the capital importation documentation where the investor is foreign.