A startup term sheet, line by line - from a Nigerian founder's view

A term sheet lands in your inbox. It's ten pages. Half the words you've never seen. Your co-founder asks if you should sign it immediately because it says "investment." You shouldn't. A term sheet is not a binding contract-it's a negotiation document that sets the terms under which an investor will put money into your company. Understanding what each clause actually means, and what you can push back on, is the difference between a round that funds your growth and one that leaves you with no control over your own company.

This guide walks through a real term sheet, line by line, the way a Nigerian founder needs to see it. We've worked with founders at LaunchPad who've signed sheets that handed away board control, diluted them far beyond market rate, or locked them into unfavourable liquidation preferences. Most of those mistakes were preventable. By the end of this article, you'll know what to accept, what to negotiate, and what to walk away from.

What a term sheet actually is

A term sheet is a non-binding summary of the main commercial and legal terms an investor proposes to invest in your company. It's a letter of intent, not a contract. The binding contract-the Shareholder Agreement and Articles of Association-comes after both parties sign the term sheet and you move into due diligence.

In Nigeria, most institutional investors (VCs, family offices, impact funds) will send a term sheet before they commit legal fees and time. Smaller cheques-under ₦5 million, typically-might skip straight to a SAFE or convertible note. Larger rounds, especially Series A, almost always start with a term sheet.

The key thing to understand: a term sheet is a negotiation document. Every line is up for discussion. Investors know this. Founders often don't, and they sign as-is. Don't.

The investment amount and valuation

The term sheet opens with the basic math: how much money, at what valuation, and therefore what percentage of the company the investor receives.

Example:

• Investment Amount: ₦50,000,000
• Pre-money Valuation: ₦200,000,000
• Post-money Valuation: ₦250,000,000
• Investor Equity: 20%

The pre-money valuation is what your company is worth before the investment. The post-money is the total value after the investment is in. The investor's percentage is the investment divided by post-money (₦50M ÷ ₦250M = 20%).

This is where most founders get stuck. You need to know: is ₦200 million a fair pre-money valuation for your stage? That depends on your revenue, traction, team, and market. If you're pre-revenue, ₦50-150 million is typical for an early-stage SaaS or fintech in Lagos. If you have ₦2 million ARR (annual recurring revenue), ₦300-500 million is more defensible. If you're in Kano or Port Harcourt with less obvious traction to Lagos-based investors, you may face pressure downward.

The honest answer: you need benchmarks. Look at every Nigerian VC writing checks in 2026, ranked by check size to see what other founders in your stage and sector have raised at. If your valuation is 3x lower than a comparable deal, that's a red flag. If it's 3x higher, you may not be defensible in due diligence.

One more thing: pre-money valuation is what you negotiate. Post-money is calculated. Don't let an investor move the post-money number and claim they're being generous-they're just moving the pre-money down.

Investor rights: preference shares and liquidation preference

This is where most founders get hurt. The investor doesn't buy ordinary shares. They buy preference shares, which come with a list of rights that ordinary shareholders (you, your co-founders, early employees) don't have.

The most important right is the liquidation preference. Here's an example:

1x non-participating preferred share with non-cumulative dividend

Breakdown:

• 1x: The investor gets back ₦50 million (their investment) before anyone else gets anything.
• Non-participating: After they get their 1x back, they don't get a second bite. They can't claim their 20% of the remaining proceeds. (If it said "participating," they'd get 1x back plus 20% of what's left-devastating in a big exit.)
• Non-cumulative dividend: If the company doesn't pay a dividend in year one, the investor doesn't get paid interest on that unpaid dividend in year two. (Cumulative would mean they do.)

Why does this matter? Imagine your company exits for ₦300 million. With 1x non-participating:

• Investor gets ₦50 million.
• Remaining ₦250 million is split among all shareholders (including the investor) by ownership percentage.
• Investor ends up with ₦50M + (20% of ₦250M) = ₦50M + ₦50M = ₦100M.

Now imagine the investor had 2x participating preference:

• Investor gets 2x: ₦100 million.
• Remaining ₦200 million is split by ownership percentage.
• Investor gets ₦100M + (20% of ₦200M) = ₦100M + ₦40M = ₦140M.
• You, with 40% ordinary shares, get only ₦80M instead of ₦120M.

This is standard negotiation territory. Most institutional investors in Nigeria will accept 1x non-participating. Some will push for 1.5x or 2x, especially if they're investing in a crowded sector or if your traction is soft. Push back. 1x is market. Anything higher needs a reason (you're pre-revenue, or the market is very risky).

Board seats and governance

The term sheet will specify how many board seats the investor gets, how many you keep, and whether there are independent directors.

Typical structure for a ₦50M seed round:

• Founder: 1 seat
• Investor: 1 seat
• Independent director: 1 seat

Total: 3 seats. Founder has 1/3 control. Investor has 1/3. Independent director has 1/3.

This is fair for a seed round. If the investor pushes for 2 seats (investor control), push back unless they're leading a large round and bringing strategic value beyond capital. If you're raising Series A with multiple investors, the board might expand to 5 or 7 seats-founder, lead investor, second investor, independent director, and maybe the CEO.

The key clause here is board observation rights. Even if an investor doesn't get a seat, they might negotiate the right to attend and observe board meetings. This is usually fine. It's low-cost for you and gives the investor visibility.

One warning: check whether the term sheet gives the investor protective provisions-the right to veto certain decisions (hiring a CFO, raising debt, selling the company, changing the cap table). This is normal for preference shares, but the list should be reasonable. You shouldn't need investor approval to hire a contractor or spend ₦500,000. You probably should if you're raising a new round at a lower valuation or selling the company.

Dilution and anti-dilution

Anti-dilution clauses protect the investor if you raise a future round at a lower valuation. They're controversial.

Example: You raise ₦50M at ₦200M pre-money (investor gets 20%). Two years later, you raise a Series A at ₦100M pre-money (lower valuation-the market is tough, or your traction is slower than expected). Without anti-dilution, the seed investor stays at 20%. With anti-dilution, they get extra shares to protect their ownership stake.

There are two types:

1. Broad-based weighted average: Investor's share is recalculated based on the ratio of the old valuation to the new one, weighted by the number of shares outstanding. This is the most founder-friendly anti-dilution.

2. Narrow-based weighted average: Same calculation, but only counts preference shares outstanding, not ordinary shares. This is harsher on founders.

3. Full ratchet: Investor's share price resets to match the new (lower) round. This is the worst for founders and is rare in Nigeria.

Most Nigerian VCs will ask for broad-based weighted average. It's reasonable. Full ratchet is a red flag-walk away if that's on the sheet. If the investor insists on narrow-based, negotiate to broad-based. The cost to you is dilution, but it's a fair dilution, not punitive.

One exception: if you're raising a seed and the investor agrees to waive anti-dilution for the first Series A, that's excellent. It means they won't dilute you if the next round is lower. That's rare, but worth asking for.

Drag-along and tag-along rights

These clauses control what happens when the company is sold or acquired.

Drag-along: If shareholders holding a majority stake (say, 70%) vote to sell the company, they can force minority shareholders to sell too. This is standard and reasonable. It prevents one founder from blocking a sale that everyone else wants.

Tag-along: If the investor is selling their shares (usually only in an acquisition), minority shareholders can "tag along" and sell their shares at the same price. This protects founders. Without it, the investor could sell to a buyer who doesn't want to keep the founders, and the founders would be stuck.

Both are standard. Make sure both are in the term sheet. If drag-along is there but tag-along isn't, negotiate to add it.

Conversion and redemption

Conversion rights let the investor convert their preference shares into ordinary shares, usually at an IPO. Redemption rights let them force the company to buy back their shares if an IPO hasn't happened by a certain date.

Conversion is standard and fine. Redemption is a red flag. If the investor has redemption rights and the company hasn't exited in 7 years, they can force a buyback. In Nigeria, this is rare (most rounds are smaller and investors are more patient), but if it's in the term sheet, negotiate to remove it or extend the timeline to 10+ years.

Information and inspection rights

The investor will want monthly or quarterly financial reports, annual audits, and the right to inspect the company's books. This is standard and reasonable. You should be tracking this anyway.

Make sure the term sheet specifies:

• Frequency of reporting (monthly or quarterly).
• What's included (P&L, balance sheet, cash flow, KPIs).
• Who bears the cost of audits (usually the company).

If the investor asks for weekly reports or the right to inspect the office unannounced, that's excessive. Negotiate to quarterly reports and scheduled site visits.

Investor pro-rata rights

Pro-rata rights let the investor buy shares in future rounds to maintain their ownership percentage. This is standard and usually fine. It means if you raise Series A and the seed investor wants to participate, they can buy enough to stay at 20% (or whatever their current stake is).

The only negotiation here is whether pro-rata rights are capped. Some investors will only participate in the next round (Series A), not Series B. Some will have unlimited pro-rata. For you, unlimited is better-it means the investor stays invested and motivated to help. For the investor, it's a commitment to follow their money. Most Nigerian VCs will accept unlimited pro-rata for seed rounds.

Expenses and legal fees

The term sheet will say who pays for legal fees, due diligence, and other transaction costs. In Nigeria, it's common for the company to pay the investor's legal fees (typically ₦1-3 million for a seed round, ₦5-10 million for Series A). This is negotiable.

If the investor is a large VC (Paystack's founders' fund, Greycroft, TinCan), they might absorb their own fees. Smaller VCs might ask the company to pay. You can push back, especially if the round is small (under ₦30M). Say the company can't absorb ₦2M in legal fees and ask the investor to split it 50/50 or cover their own.

Due diligence costs (accountant, lawyer to review contracts) are usually split or borne by the company. This is less negotiable, but you can cap it.

Conditions precedent and closing

The term sheet will list conditions that must be met before money hits your account. Common ones:

• Cap table audit (investor confirms you own what you say you own).
• No material adverse change (company didn't lose a major customer, get sued, etc.).
• Founder employment agreements (you're committed to work for the company for X years).
• Articles of Association updated (to reflect the investor's rights).
• Shareholder agreements signed.

Most of these are reasonable. Founder employment agreements are standard-you'll usually commit to 3-4 years. If the investor asks for 5+ years with a large penalty for leaving, negotiate down.

The "material adverse change" clause can be vague. Push for a definition: what counts as material? Loss of a customer representing >20% of revenue? A key founder leaving? A regulatory action? Get specifics in writing.

Term sheet timeline and negotiation strategy

A term sheet usually gives you 7-14 days to review and sign. This is not enough time if you're doing it alone. Here's what to do:

1. Hire a lawyer: Find a startup-friendly lawyer in Lagos (or your city) who's done this before. They'll cost ₦500,000-1.5M for a seed round review. Worth it. They'll spot issues you won't.

2. Get a second opinion: Send the term sheet to a founder who's raised before, or to an advisor. They'll flag red flags.

3. Benchmark: Check what other founders in your stage have accepted. Look at raising pre-seed in Nigeria to see what investors actually want in 2026. This will give you confidence in your negotiation.

4. Prioritize your pushbacks: You can't negotiate everything. Pick 2-3 things that matter most (valuation, board control, liquidation preference) and push on those. Let the small stuff go.

5. Get it in writing: If you negotiate something verbally, make sure it's in the final term sheet. Don't rely on a handshake.

SAFE vs. convertible note vs. term sheet

If you're raising under ₦20M, you might skip the term sheet and use a SAFE (Simple Agreement for Future Equity) or convertible note instead. Both are simpler and cheaper.

A SAFE is a promise that when you raise a future round, the investor's money converts to equity at a discount. There's no equity now, no board seat, no preference shares. It's cleaner for early stage.

A convertible note is a loan that converts to equity at a future round. It has interest and a maturity date (usually 2 years). If you don't raise a round by the maturity date, you owe the investor their money back with interest. That's risky.

For a seed round in Nigeria, a SAFE is increasingly common. For anything over ₦30M, a term sheet is standard. The reason: larger checks justify the legal overhead, and investors want governance rights.

If you're raising with a Nigerian VC, ask what they prefer. Some (like Paystack's founders' fund, Lofund) use SAFEs for early stage. Others (like Greycroft, Cassava) use term sheets. There's no wrong answer-just pick what's right for your round size.

Red flags in a term sheet

Walk away if you see:

1. Full ratchet anti-dilution: Investor's shares reset to match any lower future round. Punitive.
2. Redemption rights without a long timeline: Investor can force a buyback after 5 years if no exit. Risky.
3. Cumulative dividends: Unpaid dividends accrue interest. You'll owe compounding debt.
4. Broad protective provisions: Investor can veto hiring, spending, fundraising. You lose operational control.
5. Founder non-compete: Investor tries to stop you from working in the sector for 2+ years after exit. Unusual and unfair.
6. Excessive legal fees: Investor asks company to pay ₦5M+ in legal costs for a ₦30M round. Negotiate.
7. No tag-along rights: Investor can sell in an acquisition but you can't. Unfair.

None of these are deal-breakers on their own, but they're all negotiable. If an investor refuses to budge on multiple red flags, they're probably not the right partner.

After you sign the term sheet

Once both parties sign, you move into due diligence. This is when the investor's lawyers and accountants dig into your cap table, contracts, IP, compliance, and financials. Expect 4-8 weeks.

During due diligence, you'll need:

• Cap table (who owns what, with all historical rounds).
• Articles of Association and Shareholder Agreements from any prior rounds.
• Articles of Association updated to reflect the new investor's rights.
• Financial statements (last 2 years, or since founding if less than 2 years old).
• Customer contracts (redacted if confidential).
• IP assignment agreements (proof that founders own the code/product).
• Employment agreements for all employees.
• Compliance: CAC registration, tax filings, regulatory approvals (if applicable).

If you don't have these, start gathering them now. If you're missing IP assignments or employment agreements, fix that before the term sheet. It'll slow down due diligence otherwise.

For Nigerian startups, also prepare:

• FIRS Tax Identification Number (TIN).
• CAC Business Name registration.
• Proof of office address (utility bill, lease agreement).
• Beneficial ownership declaration (if required by CBN or your state).

One more thing: if you're raising a larger round (Series A+), you'll need a VC-friendly corporate structure. Check out VC-friendly corporate structures for African startups to understand whether you should be incorporated in Nigeria, Delaware, or both.

FAQ

Q: Can I negotiate every line of a term sheet? A: Yes, but prioritize. Valuation, liquidation preference, and board control are the big ones. Legal fees and reporting frequency are smaller. Investors expect pushback on the big stuff; they'll accept it if it's reasonable.

Q: What if the investor won't budge on terms I don't like? A: You can walk away. It's better to raise at a lower valuation from a reasonable investor than at a high valuation from someone who'll be difficult to work with. Remember: your investor will be on your cap table for 5-10 years. Choose carefully.

Q: Should I hire a lawyer to review the term sheet? A: Yes. A startup lawyer in Lagos costs ₦500k-1.5M and will save you far more in bad terms. They'll also speed up the negotiation by flagging standard vs. non-standard clauses.

Q: What's the difference between a term sheet and a Shareholder Agreement? A: A term sheet is a summary of the main terms, usually non-binding. A Shareholder Agreement is the binding contract that comes after the term sheet is signed and due diligence is done. The Shareholder Agreement is much longer and includes detailed governance, investor rights, and exit terms.

Q: If I'm raising a SAFE instead of a term sheet, what should I negotiate? A: The discount rate (usually 20-30%) and the valuation cap (the maximum valuation at which the SAFE converts). Push for a higher discount (30% is better than 20%) and a reasonable cap (usually 2-3x your seed valuation). The SAFE itself is pretty standard-there's less to negotiate than a term sheet.

What to do next

If you're about to sign a term sheet, start here: read raising pre-seed in Nigeria to see what investors actually want in 2026 to understand what's reasonable for your stage. Then hire a lawyer to review the sheet. Don't skip this step.

If you're still deciding which investors to approach, check every Nigerian VC writing checks in 2026, ranked by check size to see who's active in your sector and what their typical terms are. This will give you benchmarks before you even get a term sheet.

And if you're raising a larger round and need to think about corporate structure, read VC-friendly corporate structures for African startups to understand whether you should incorporate in Nigeria, Delaware, or both.