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In Ontario’s start-up ecosystem, a term sheet is usually the first written handshake between founders and investors. It’s short, often two to five pages, and many of its clauses are labelled “non-binding.” Yet those pages set the negotiating agenda for every share purchase agreement and shareholders’ agreement that follows. Miss a detail here, and you will fight uphill later, or overpay for a risk you could have avoided.
This post explains why term sheets matter, what provisions drive economics and governance, and how investors can leverage the document to protect their interests before due-diligence costs pile up.
What a Term Sheet Really Does
A term sheet is not the final contract; it is the playbook. By outlining price, rights, and timelines in plain language, it:
- Anchors valuation and cap-table math so everyone sees ownership outcomes before dilution.
– - Flags deal-killer issues early, from board control to founder vesting, before lawyers draft 60-page agreements.
– - Creates moral commitment; walking away after signing risks reputational damage, even if clauses are technically non-binding.
– - Saves transaction costs by narrowing the scope of legal drafting and due diligence to agreed business terms.
In short, a clear term sheet buys speed and certainty at the very stage when momentum is most fragile.
Binding vs. Non-Binding Clauses
Most Ontario venture term sheets are non-binding on economics but binding on a few critical points:
- Exclusivity / No-Shop – Founders agree not to solicit other offers for 30–60 days, giving investors time to complete diligence.
– - Confidentiality – Prevents deal terms from leaking to competitors or future investors.
– - Expenses – Often states who pays legal fees if the deal collapses.
Investors should insist these limited provisions are expressly binding and enforceable under Ontario law; otherwise, founders can shop the term sheet the moment it arrives.
Economic Terms That Matter Most
Valuation and Capitalisation
Specify whether the figure is pre-money or post-money and account for any option-pool increase required at closing. A table illustrating fully diluted ownership before and after the raise removes guesswork and prevents back-end surprises.
Liquidation Preference
A 1× non-participating preference is market standard for seed and Series A rounds in Ontario. It ensures investors recoup their capital ahead of common shareholders if the company exits below expectations. Multiple or participating preferences tilt returns but may deter later-stage investors.
Anti-Dilution Protection
Weighted-average anti-dilution language softens the impact of a down round without torpedoing the cap table. Clarify trigger events—legitimate equity financings only—and exclude employee stock-option grants.
Dividends
Most start-ups do not pay dividends, but the term sheet should state whether they are non-cumulative (preferred shares accrue nothing if unpaid) or cumulative (accrue and increase liquidation preference). Non-cumulative is typical; cumulative unexpectedly compounds investor preference.
Governance Levers
Board Composition
Investors often request one seat or a board-observer role. Define:
- Number of seats and whether expansion requires investor consent.
– - Quorum rules—can founders hold meetings without the investor?
– - Information rights for observers, including access to board materials.
Protective Provisions
A list of actions—issuing new shares, taking on debt, changing bylaws—that require investor consent safeguards minority interests. The term sheet should itemise these actions so lawyers can drop them into the shareholders’ agreement verbatim.
Founder Vesting and Reverse Vesting
If founders still have unvested equity, the term sheet should outline how much will vest over what period and the buyback price for unvested shares on departure. Reverse vesting keeps founders aligned with long-term growth.
Control Terms That Often Slip Through
- Drag-Along Rights – Force minority holders to sell if a qualified majority approves a sale, ensuring deal certainty for buyers.
– - Tag-Along Rights – Allow minority investors to piggyback if founders sell secondary shares.
– - Right of First Refusal (ROFR) – Gives the company or investors the first chance to buy shares offered to outsiders.–
Spelling these out early avoids last-minute stalemates when long-form documents circulate.
Timelines and Closing Mechanics
A well-drafted term sheet includes:
- Closing Target Date – Keeps everyone accountable.
– - Conditions Precedent – Intellectual-property assignments, key-man insurance, or regulatory approvals that must occur before cash is wired.
– - Outside Date – If conditions aren’t met by this date, parties can walk away without liability.
These provisions prevent capital from being captive in a never-ending fundraising loop.
Red Flags for Investors
- Missing Option-Pool Clarification – Could shrink investor ownership post-closing.
– - Unlimited Founder Salaries – Without board consent language, founders can drain runway.
– - Vague Use-of-Proceeds Statements – Funds may be redirected to low-priority projects.
– - Full-Ratchet Anti-Dilution – Protects early investors but poisons later rounds; negotiate weighted-average instead.
– - No Exclusivity – Enables founders to shop your term sheet, eroding negotiating leverage.
Spotting these issues early saves legal fees and reduces the risk of walk-aways.
Negotiation Best Practices
- Prioritise, Then Push – Identify two or three must-haves (e.g., board seat, preference, pro rata rights) and trade less-critical points to secure them.
– - Model Scenarios – Run cap-table and exit waterfalls under best, base, and worst cases to quantify each clause’s impact.
– - Leverage Precedent – Cite market data—NVCA templates, Canadian Venture Playbook—to justify positions as standard, not punitive.
– - Document in Plain English – Ambiguity fuels later disputes; clarity today is cheap insurance.
– - Keep the Deal Alive – Heavy legalese or punitive clauses can chill founder appetite; balance protection with pragmatism.
How AMAR-VR LAW Can Support
Term sheets look simple, but every word can ripple through valuation, control, and exit economics. AMAR-VR LAW advises Ontario investors from first draft to signature. We benchmark terms against current market norms, stress-test cap-table scenarios, flag regulatory gaps, and craft protective language that accelerates, rather than stalls, negotiations. Our guidance ensures your key rights survive translation into definitive agreements and remain enforceable under Ontario securities law.
Conclusion
A term sheet is not merely a courtesy document; it’s the architectural blueprint of an early-stage investment. By nailing down valuation hygiene, liquidation and anti-dilution safeguards, governance rights, and clear closing timelines, investors lock in protection when their bargaining power is highest and transaction costs are lowest.
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Contact us today for a consultation if you are preparing or reviewing a term sheet for an Ontario start-up. We will help you secure fair economics, balanced control, and a smooth path to closing—so your capital can get to work, protected from day one.
Frequently Asked Questions (FAQs)
- Why does the term sheet matter if it’s mostly non-binding?
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While economic terms may be non-binding, term sheets frame the negotiation and guide all future documents. They establish valuation, governance, and investor protections—making them critical to get right before legal drafting begins.
– - What key protections should investors include in a term sheet?
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Investors should prioritise liquidation preferences, anti-dilution clauses, board rights, protective provisions, and information rights. These terms shape both control and financial return across the company’s life cycle.
– - Can investors walk away after signing a term sheet?
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Technically yes, but reputational risk is high. Binding clauses like exclusivity and confidentiality may limit alternatives. A term sheet creates moral and strategic commitment even without full contractual force.
– - What red flags should Ontario investors watch for?
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Red flags include ambiguous option-pool language, lack of exclusivity, full-ratchet anti-dilution, and open-ended use-of-proceeds. These omissions can quietly erode investor protections or negotiation leverage.
– - How does AMAR-VR LAW support investors at the term-sheet stage?
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We review and draft term sheets that align with Ontario securities law, flag hidden risks, and benchmark terms against market standards. Our legal input ensures key rights are enforceable and well-positioned for long-form agreements.