The first term sheet you're handed will look reassuringly short - two or three pages, plenty of white space, a tone that suggests the hard part is already done. It isn't. That document is where the economics of the deal are decided, in language designed to read as friendly while quietly settling who gets paid, how much, and in what order if things go well or badly. The valuation gets all the attention. The clauses underneath it do most of the work.
So before you initial anything, it's worth knowing what a term sheet actually is, which parts of it can bind you on the spot, and which few lines deserve a second read and, frankly, a lawyer.
What is a term sheet, exactly?
A term sheet is a summary of the proposed terms of an investment, set down before the full legal contracts - the subscription agreement and the shareholders' agreement, in a UK round - are negotiated and signed. Think of it as the architect's sketch rather than the building. It records what both sides think they've agreed: how much is going in, at what valuation, for what kind of shares, and with which rights attached.
Its job is to flush out disagreement early. If the founder thinks they're selling 10% and the lead thinks they're buying 20%, far better to find out on a two-page sketch than three weeks into a £40,000 legal bill. Once it's agreed, the lawyers draft the long-form documents to match - and those are the papers that bind everyone.
Is a term sheet legally binding?
Mostly, no - and that surprises people. The commercial heart of the document, the valuation and the share rights, is normally drafted as a statement of intent: subject to due diligence, subject to contract, non-binding. Either side can still walk.
But a few clauses usually do bind from the moment of signing, and they're easy to skim past:
- Confidentiality. You agree not to broadcast the terms, or sometimes the company's information, around your network.
- Exclusivity or a no-shop period. The company agrees not to court other investors for a set window, typically 30 to 60 days, while the deal is finalised.
- Costs. Who pays the legal fees, and what happens to them if the deal collapses.
The rule of thumb: don't trust the word "non-binding" at the top of the page. Trust the drafting of each clause. A well-built term sheet says explicitly which paragraphs bind and which don't. If yours doesn't, that's the first thing to ask about.
The valuation gets the attention. The clauses underneath it do the work.
What economic terms should an angel read first?
Three numbers and one clause set how much of the company your cheque buys, and what it's worth when an exit comes.
The valuation is the price tag, quoted either pre-money (before your money goes in) or post-money (after). The distinction isn't pedantry: a £4 million pre-money company taking £1 million is worth £5 million post-money, and the new money owns 20%. Quote the wrong one and the same headline number implies a very different slice. Always confirm which you're being shown.
The amount and the round size tell you how much is being raised in total and how much of it is yours - leading a £750,000 seed round is a different proposition from putting £25,000 into it.
The option pool - shares set aside for future employees - is the quiet one. Where it sits in the maths matters: created out of the pre-money valuation, the founders bear the dilution; created after, the new investors share it. A routine line that moves real ownership.
Which control and protection clauses matter most?
Past the economics sit the rights - the clauses that decide what happens in the good outcome and, more pointedly, the bad one. These are where the real negotiation lives.
Liquidation preference
This is the clause that decides who gets paid first when the company is sold or wound up. A 1x non-participating preference - the common, founder-friendly seed-stage position - lets the holder take back their original investment before ordinary shareholders see anything, then choose the larger of that sum or their straight percentage of the proceeds. A participating preference is greedier: the holder takes their money back and then shares in what's left. In a modest exit, a stack of participating preferences can leave founders and early angels with very little. If you read one clause twice, make it this one.
Anti-dilution
Anti-dilution protects an investor if the company later raises at a lower valuation - a down round. The gentle, widely accepted version is broad-based weighted average, which adjusts your position modestly. The aggressive version, full ratchet, repriced your earlier shares as if you'd paid the lower price all along, and falls hard on everyone without the protection. As an angel you may be the one protected by it or the one diluted by someone else's; either way, know which flavour is in the document.
Pro-rata rights and the rest
Pro-rata rights let you put more money into future rounds to keep your percentage as the company raises again - valuable if it does well, and one of the few rights an angel should actively want. Around them sit the governance clauses: information rights (the financials you're entitled to see), board seats or observer rights, drag-along (which can force you to sell if a majority agrees to an exit) and tag-along (which lets you join a sale on the same terms). None is exotic. All change what your shareholding actually means.
How does a term sheet interact with SEIS and EIS?
Here's the British wrinkle that catches people out. SEIS and EIS relief generally require ordinary shares carrying no preferential right to your money - so a term sheet that hands the angel round a liquidation preference, or a special right to a dividend, can put the relief at risk. The clause that protects your downside can quietly cancel the tax break that was half the reason you were comfortable with the downside in the first place.
The reliefs are worth being precise about. SEIS offers 50% income tax relief on up to £200,000 a tax year, with a three-year minimum hold; EIS offers 30% on up to £1,000,000 (or £2,000,000 if at least £1,000,000 goes into knowledge-intensive companies), also held three years. Both depend on the company qualifying - on the EIS side, broadly gross assets up to £30 million before the shares are issued, fewer than 250 full-time-equivalent employees, within seven years of first commercial sale, and within the limits on what it can raise across the venture-capital schemes (up to £10 million in any 12-month period and £24 million over its lifetime, with higher limits for knowledge-intensive companies). Those company-side figures were adjusted for 2026, so confirm the number that applies to a specific deal on HMRC's EIS guidance on gov.uk. The mechanics are the same on both schemes: the company needs advance assurance from HMRC before the round, and issues you a SEIS3 or EIS3 certificate after your shares are, which you use to claim through Self Assessment. You generally need to be a UK taxpayer for any of it to be worth having.
The practical point: if SEIS or EIS relief is part of why you're investing, have the share structure on the term sheet checked before you sign, not after.
How should an angel approach a term sheet?
Read the binding clauses first, the rights second, and the valuation third - the opposite order to most people's instinct. Ask which paragraphs bind. Find the liquidation preference and make sure you understand the multiple and whether it participates. Check whether the share class keeps your SEIS or EIS relief intact. And remember that as a following angel you're usually taking the terms the lead negotiated, which is a reason to read them carefully, not a reason to skip them.
A word on what this article is and isn't: it's general information, not financial or investment advice. Term sheets are legal documents and the tax rules around them change. Before you sign one, take advice from an FCA-regulated adviser and a solicitor, and confirm the current tax position with HMRC on gov.uk.
Frequently asked questions
Is a term sheet legally binding?
Mostly no. The commercial terms - valuation, amount, the share rights - are usually expressed as non-binding intentions, subject to due diligence and to the long-form legal documents that follow. A handful of clauses are normally binding even so: confidentiality, exclusivity or a no-shop period, and who pays the legal costs if the deal collapses. Read the document for which paragraphs say they bind and which say they don't, because the drafting, not the label at the top, decides it.
What is a liquidation preference on a term sheet?
A liquidation preference sets who gets paid first, and how much, when a company is sold or wound up. A 1x non-participating preference means the holder takes back their money before the ordinary shareholders, then chooses either that sum or their percentage of the proceeds - whichever is larger. A participating preference lets them take their money back and then share in the rest, which can leave founders and early angels with far less in a modest exit. For most seed-stage UK deals, 1x non-participating is the common, founder-friendly position.
What is the difference between a term sheet and a SAFE?
A term sheet summarises the headline terms of a priced equity round before the full contracts are drawn up - shares are issued at an agreed valuation. A SAFE, or Simple Agreement for Future Equity, is itself the investment contract: you put money in now and receive shares later, usually at the next priced round, with the valuation deferred. A plain SAFE often will not qualify for SEIS or EIS relief because those schemes generally need shares issued at the time you invest, which is why many UK rounds use a priced round or an advance subscription agreement instead.
Does a term sheet affect my SEIS or EIS relief?
It can. SEIS and EIS relief generally require ordinary shares with no preferential right to your money, so a term sheet that loads the angel round with a liquidation preference or special dividend rights may put the relief at risk. The reliefs also depend on the company qualifying and holding HMRC advance assurance, with SEIS3 or EIS3 certificates issued after your shares are. If the relief matters to you, have the structure checked before you sign. This is general information, not advice - confirm the current rules on gov.uk.
Who draws up the term sheet in an angel round?
Usually the lead investor, sometimes the founder, occasionally a standardised template the parties agree to use. The lead negotiates valuation and the headline conditions and does most of the due diligence; other angels then follow on, often through a syndicate that appears as one line on the cap table. Backing a credible lead is how many newer angels get into deals, but the terms still bind you, so it is worth reading them rather than taking the lead's word for it.