A term sheet is not a formality. It is the document that decides who really controls your company.
Most founders celebrate when a term sheet arrives and rightly so. Reaching that stage means an investor is serious. But the celebration often ends there. Too many founders skim the document, hand it to a generalist lawyer, and accept terms that quietly erode their equity, control, and flexibility for years to come.
The Deeper Problem: Founders Don’t Know What They’re Reading
Every term sheet clause falls into one of two categories: economic terms or control terms. Get comfortable with that lens before reading a single provision. Either money flow is affected, or decision-making power is. Everything else is detailed.
The first trap is valuation language. When an investor says they will invest ₦100,000 at a ₦1 million valuation, are they referring to pre-money or post-money? The difference can amount to meaningful equity. Clarify this before anything else.
Five Clauses That Define or Destroy Your Future
Liquidation Preference. This determines who gets paid first in an exit. A 1x non-participating preference is reasonable. Anything higher means the investor recovers their return before you see a naira. The terms you grant now set a precedent every future investor will reference so keep it simple.
Anti-Dilution. If you raise a future round at a lower valuation, this clause adjusts the investor’s stake upwards. Broad-based weighted average anti-dilution is the founder-friendly standard. Full ratchet anti-dilution can be devastating, even a single share issued below the original price triggers a full reset.
Drag-Along Rights. This allows majority shareholders to force minority shareholders into a sale. Watch the trigger threshold carefully. A shareholder holding 10% of your company should not have the power to drag you into a transaction you did not choose.
Vesting Provisions. Investors are backing your team as much as your idea. A one-year cliff followed by monthly vesting is standard. Preserve enough equity in your option pool to attract future hires especially if a co-founder leaves.
Protective Provisions. These are reserved matters requiring investor approval before major decisions. Know exactly what you cannot do without sign-off and ensure that list is as short as possible.
The Mistake That Costs More Than All the Others
Getting the wrong lawyer. A family friend who handles property deals is not equipped to review a venture investment term sheet. You need a transaction lawyer with specific experience in early-stage deals. This document is the foundation your entire investor relationship is built on.
One final insight: the way your investor negotiates the term sheet is the way they will behave as a partner. If the process feels combative before a deal is even signed, take that seriously.
At Eko Innovation Centre, we support founders with mentorship, strategic guidance, and access to ecosystem resources that help startups navigate fundraising, governance, and investment readiness at every stage of growth.