What to Watch in NZ Fundraising Term Sheets for Startups

A fundraising term sheet can feel like a big milestone for a New Zealand startup, but it is also where founders often give away more than they expected. Common mistakes include treating the term sheet like a harmless summary, focusing only on valuation while missing control rights, and relying on verbal assurances that never make it into the document. Another regular problem is signing too early, before the cap table, employee share arrangements, or existing shareholder rights have been properly checked.

The point of a term sheet is to set the commercial and legal framework for an investment round. Even when parts of it are described as non-binding, it still shapes the deal and can lock you into negotiation positions that are hard to unwind later. Before you sign, you need to know which clauses are really binding, what investor protections are being asked for, and how the proposal will affect future rounds, founder control, and day to day decision-making.

This guide explains how a fundraising term sheet usually works in New Zealand, the legal issues to review before you sign, and the mistakes that regularly catch founders who are moving fast.

Overview

A fundraising term sheet is the roadmap for your investment deal. It usually sets out valuation, share rights, investor protections, exclusivity, confidentiality, and the process for due diligence, contract review, and final documents.

The right term sheet helps everyone move efficiently. A poorly drafted one can create avoidable disputes, founder deadlock, or a cap table that is difficult to manage in later funding rounds.

• Whether the term sheet is intended to be binding in whole or in part
• The price, valuation method, and how dilution will work after the investment
• What type of shares or convertible instrument is being issued
• Investor rights, including board seats, veto rights, information rights, and consent rights
• Founder obligations, including vesting, restraint clauses, and commitment expectations
• Conditions precedent, due diligence steps, and any exclusivity or no-shop period
• How the term sheet interacts with your constitution, shareholders agreement, and existing cap table
• Whether the proposed structure could create issues in a future raise or exit

What Fundraising Term Sheet Means For New Zealand Businesses

A fundraising term sheet is usually the first serious written expression of the deal between a startup and an investor. It is not usually the final investment agreement, but it has real legal and commercial weight.

For New Zealand businesses, the term sheet often sits between early commercial discussions and the long form transaction documents. Those final documents might include a subscription agreement, shareholders agreement, updated constitution, disclosure materials, and board or shareholder approvals.

It sets the negotiating baseline

Once both sides sign a term sheet, the terms in it tend to become the reference point for the rest of the deal. Even where a clause is technically non-binding, it can be hard in practice to walk it back without damaging trust or slowing the raise.

This is why founders should not treat the term sheet as a casual summary. If the investor says the legal detail can be sorted out later, that may be true for some mechanics, but the commercial leverage is often already set.

It can contain binding clauses

Many term sheets say that most commercial terms are non-binding, except for specific clauses. In practice, binding clauses commonly cover:

• Confidentiality
• Exclusivity or no-shop obligations
• Costs, including who pays legal fees
• Governing law and dispute process

This matters because a founder may think, “we can still walk away”, while being legally tied to stop negotiating with other investors for a set period. If your runway is short, an exclusivity clause can become a serious commercial risk.

It needs to fit your company documents

A fundraising term sheet does not operate in isolation. If your company already has a constitution, existing shareholders agreement, employee share scheme, convertible notes, or SAFEs, the new terms need to fit with those documents.

For example, a term sheet might propose a new investor veto right over issuing shares. But if your constitution or shareholders agreement already has pre-emptive rights, drag-along rules, or reserved matters, the new deal may require amendments and formal approvals.

It raises Companies Act and governance issues

Investment rounds in New Zealand often require directors to think carefully about their governance duties, board process, and shareholder approvals. The company may need to issue new shares, update share registers, and record resolutions correctly.

The mechanics will depend on your structure and existing documents. The legal point is simple: the term sheet should not promise a result that the company cannot validly implement.

It influences future funding and exits

The rights given away in an early term sheet can follow the company for years. Investors in later rounds will examine your existing cap table and rights package closely.

This is where founders often get caught. A term sheet that feels acceptable in a tight fundraising moment can create future problems such as:

• Too many veto rights that slow decisions
• Multiple classes of shares with conflicting rights
• Aggressive liquidation preferences that make exit proceeds uneven
• Founder vesting terms that create uncertainty for later investors
• Anti-dilution settings that complicate future rounds

Legal Issues To Check Before You Sign

Before you sign a fundraising term sheet, you need to know exactly what economic rights, control rights, and restrictions are being proposed. The main risk is not just a bad valuation, it is agreeing to legal mechanics that you do not fully understand.

Valuation and pricing

Valuation is usually the first figure founders focus on, but you need to check how it is being expressed. Is it pre-money or post-money? Does the option pool get counted before or after the investment? Are any convertible instruments already in play?

Small drafting differences can have a major effect on dilution. Before you sign, ask for the cap table impact to be shown clearly, including:

• Current shareholdings
• Any options or employee share entitlements
• Existing convertible notes or similar instruments
• The proposed issue price and number of shares
• The post-investment ownership percentages

Type of security being issued

Not every raise is a straight ordinary share issue. A term sheet might involve preference shares, convertible notes, or another convertible instrument.

Each structure brings different legal consequences. Preference shares may carry priority rights on exit. Convertible notes may create interest, maturity dates, discount mechanics, or valuation caps. Founders should make sure the written terms state clearly what is being issued and when conversion happens.

Liquidation preference

Liquidation preference decides who gets paid first on an exit, sale, or winding up. This clause can dramatically change founder outcomes even where the headline valuation looks strong.

Key questions include:

• Is the preference 1x or higher?
• Is it participating or non-participating?
• Does it apply only on liquidation, or also on a sale event?
• Are there multiple investor classes with stacked preferences?

A founder can end up with little or no exit value if the preference structure is too investor-heavy.

Control rights and investor consents

Control rights often matter more than price. A term sheet may give an investor a board seat, board observer right, or veto power over certain company decisions.

Some reserved matters are standard. Others can be too broad for a young company. Review proposed consent rights carefully, especially for matters such as:

• Issuing more shares
• Changing the constitution
• Taking on debt
• Approving budgets
• Hiring or removing senior executives
• Selling key assets
• Entering related-party transactions

The issue is not that investor protections are inherently unreasonable. The issue is whether the consent rights are proportionate and practical for your stage of business.

Founder vesting and leaver provisions

Investors often want founder shares to vest over time, especially if the business depends heavily on the founding team. That is common, but the detail matters.

Before you sign, check:

• What percentage of founder shares are subject to vesting
• The vesting period and any cliff
• What happens if a founder leaves due to illness, dispute, or termination
• How good leaver and bad leaver provisions are defined
• Whether vested or unvested shares can be bought back, and at what price

This is one of the most personal areas of the term sheet. It should be fair, commercially realistic, and aligned with founder expectations.

Anti-dilution protections

Anti-dilution clauses protect investors if the company later raises at a lower valuation. These clauses can significantly dilute founders and early employees.

Weighted average anti-dilution is generally less severe than full ratchet. Even so, the drafting should be checked closely because formula wording can alter the result in a down round.

Information rights and reporting

Most investors will want access to financial and operational information. That is not unusual, but founders should confirm the reporting burden is realistic.

For a small startup, monthly formal board-style packs may be too heavy. The term sheet should make it clear:

• What information must be provided
• How often reports are due
• Whether audited accounts are required
• Who can access sensitive commercial information

Exclusivity and deal timetable

Exclusivity clauses stop the company from seeking or negotiating alternative funding for a period. Investors often ask for this once the term sheet is signed so they can spend time and money on due diligence.

Founders should treat exclusivity seriously. Before you accept the investor's standard terms, check the exact length of the no-shop period, whether it starts immediately, and whether there is a realistic timetable for due diligence and final documents.

If the investor delays and your business cannot approach other funders, the term sheet may leave you exposed.

Conditions precedent and due diligence

Conditions precedent are the things that must happen before the investor is required to complete the deal. These may cover legal due diligence, financial review, IP ownership, employee matters, and board approvals.

A term sheet should not leave these completely open-ended. Founders should understand what the investor will be checking and whether there are any known issues to fix first, such as:

• Missing IP assignments from contractors or founders
• Unclear employee or contractor arrangements
• Undocumented loans
• Errors in the share register or prior allotments
• Shareholder consents that were never properly obtained

Costs and legal fees

Some term sheets require the company to pay the investor's legal costs, whether or not the round completes. Others only require payment if the deal proceeds.

This clause deserves attention, especially for cash-constrained startups. Legal spend can rise quickly if negotiations become long or due diligence surfaces problems.

Securities law and disclosure context

New Zealand fundraising can raise financial markets law questions depending on who the offer is made to and how the round is structured. Early stage raises are often managed within available exemptions or wholesale investor settings, but the position depends on the facts.

Founders should not assume that because a raise is private, there are no compliance issues. The company should check that its fundraising process and documents match the legal basis for the offer.

Common Mistakes With Fundraising Term Sheet

Founders usually get into trouble with term sheets when speed replaces clarity. The most common mistake is assuming the long form documents will fix everything later.

Chasing valuation and ignoring rights

A higher headline valuation can hide more restrictive legal terms. A lower valuation with balanced governance may be a better outcome than a higher valuation with heavy veto rights, aggressive preferences, and broad founder restrictions.

Investors know this. Founders should compare the whole package, not just the number in the headline.

Signing before the cap table is cleaned up

If prior share issues, options, convertible instruments, or informal founder arrangements have not been properly documented, the term sheet may be built on inaccurate assumptions.

That can create tension later when lawyers and accountants rebuild the cap table during due diligence. Before you sign, make sure the company records are accurate and complete.

Accepting vague drafting

Ambiguous terms create room for disagreement later. Phrases such as “customary investor protections” or “market standard founder vesting” are not precise enough on their own.

If a right matters, it should be described clearly. This is especially true for liquidation preferences, anti-dilution, reserved matters, and founder leaver clauses.

Overlooking existing obligations

A startup may already have commitments under a shareholders agreement, constitution, loan arrangement, or employee share scheme. A new term sheet can conflict with those commitments.

For example, existing investors might have pre-emptive rights or approval rights over a new issue of shares. If those steps are missed, the round can become messy very quickly.

Relying on verbal promises

Founders often hear reassuring statements during negotiations, such as an investor saying a veto right will only be used in exceptional cases, or that founder vesting is “just there for optics”. If that limitation is not in the document, it may not help you later.

Before you rely on a verbal promise, ask for the wording to be reflected in the term sheet or clearly addressed in the final documents.

Giving away too much control too early

Early stage companies need enough flexibility to hire, pivot, manage cash, and make fast commercial decisions. A term sheet with broad investor consent rights can slow ordinary business decisions and create friction at board level.

This is where founders often get caught. A right that seems minor on signing day may become a real operational issue six months later.

Forgetting the next round

A term sheet should be judged not just by whether it closes the current round, but by whether it leaves the company investable later. Future investors will review your rights package, cap table, and document history.

If the current round creates unusual rights or founder-side uncertainty, the next investor may ask for a restructure before investing. That costs time and leverage.

FAQs

Is a fundraising term sheet legally binding in New Zealand?

Usually only some parts are binding, not the entire commercial deal. Confidentiality, exclusivity, costs, and governing law are often binding, while the investment terms may be expressed as subject to final documents.

Can I change the term sheet after signing it?

Yes, if both sides agree. In practice, signed terms create a strong negotiating baseline, so changes may be difficult unless there is a clear mistake, new information from due diligence, or a material commercial issue.

Do I need a lawyer before signing a term sheet?

It is sensible to get legal advice before signing, because the term sheet often shapes the final deal. Early advice can also identify issues with your constitution, cap table, shareholder rights, and founder arrangements before they become expensive problems.

What is the biggest legal risk for founders in a term sheet?

The biggest risk is usually agreeing to control rights or economic terms that look manageable at first but become restrictive later. Veto rights, liquidation preferences, anti-dilution, and founder vesting are common pressure points.

Does a term sheet need to match the final shareholders agreement?

Yes, the final transaction documents should reflect the agreed position or any negotiated changes. If there is a mismatch, disputes can arise about what was actually agreed and whether one side is trying to rewrite the deal.

Key Takeaways

• A fundraising term sheet is more than a summary, it sets the commercial and legal framework for the investment round.
• Founders should review not only valuation, but also liquidation preferences, anti-dilution, investor consent rights, founder vesting, and reporting obligations.
• Binding clauses in a term sheet often include exclusivity, confidentiality, costs, and governing law, so signing can create real obligations straight away.
• The proposed deal must work with your constitution, shareholders agreement, cap table, employee share arrangements, and prior fundraising documents.
• Ambiguous wording, unchecked company records, and reliance on verbal promises are common mistakes that can create expensive issues later.
• A good term sheet should help the current raise proceed without making future funding rounds or exits harder than they need to be.

If you want help with valuation and dilution terms, investor rights, founder vesting, and final investment documents, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.