Founder term sheet guide: how to use a founder term sheet & what to include
Updated: 8 December 2019
Founder term sheets are useful because they set clear expectations for cofounders.
Also, they summarise the rights, roles and responsibilities of cofounder’s working together before you prepare a cofounder agreement.
Term sheets are also known as heads of agreement and terms of agreement.
When to use a founder term sheet
So when should you use a founder term sheet ?
You can prepare a cofounder term sheet from the moment you and your cofounder first discuss working together.
And ... if you have not done this yet because you have been busy with everything else, that’s ok, you can prepare one any time after launch as well.
How to avoid conflict with other agreements
If you are preparing a founder term sheet after launching your startup and you already have other agreements in place like a shareholder agreement, the statement below can be helpful to handle any possible conflicts with other agreements:
Conflict with [insert agreement name]
If there is a conflict between a provision of this founder term sheet and a provision of the [insert agreement name], the [insert agreement name] will prevail.
The founders will take all steps necessary to ensure this founder term sheet and is amended in order to remove the conflict.
Why use a founder's term sheet ?
Why use a term sheet ?
Because it can be easier to decide what you will do upfront with your cofounder, before you encounter any conflict together or worse, a situation where you may not be speaking terms.
Do you need a lawyer to prepare your founder term sheet ?
No. You don't need a lawyer to prepare your initial founder term sheet.
In fact, it’s sometimes a good idea to prepare a term sheet before you see a lawyer to save time negotiating them with a lawyer and cut costs.
What if you get it wrong ?
It's likely you won't cover everything in the founder term sheet. And that's ok.
Here's a solution:
To cover for any items that you or your cofounder may miss in the term sheet, you can include this statement below:
This document does not considered an offer or agreement of any kind.
This term sheet serves only to assist in the finalisation of a formal agreement between all parties.
Any reference to currency refers to [insert currency]. All parties should seek independent legal and financial advice before proceeding with any agreement, contract and/or deed.
You can include a statement that your term sheet will be legally binding, but if you do this then you have to stick to the terms and won't be able to adjust them later.
What goes into a founder term sheet ?
Usual term sheet topics include:
- Duties and responsibilities - work that each founder will complete;
- Shares - any shares for cofounders;
- Decision making - how you and your cofounders will make decisions;
- Resource contributions - what resources you will chip and when they will be repaid from startup profits;
- Confidential information - treatment of confidential information;
- Intellectual property - intellectual property rights and protection;
- Non compete - restrictions on competing with the startup; and
- Anything else that's important to the cofounders.
What next ?
After you prepare your term sheet, a lawyer can help you draft a founder’s agreement that covers the items on the term sheet and any you may have missed.
Your sample founder term sheet
Below is a handy sample term sheet below that you may download and use for your startup.