Term Sheets In New Zealand: What Startup Founders And Investors Need To Know

If you're raising money for your startup (or thinking about investing in one), you'll almost certainly come across a term sheet.

It can feel like a "quick summary" before the real legal documents arrive - but don't be fooled. A term sheet often sets the commercial tone for the entire deal, and it can shape how much control you keep, how future funding rounds work, and what happens if things don't go to plan.

In this guide, we'll break down what a term sheet is in New Zealand, what usually goes in it, which clauses matter most, and the common traps founders and investors should watch out for.

What Is A Term Sheet (And Why Does It Matter)?

A term sheet is a document that outlines the key commercial terms of a proposed investment. It's usually agreed at the early stage of a capital raise, before anyone spends time (and money) negotiating the long-form agreements.

In plain English: it's the "deal headline" document.

Even though a term sheet is often described as "non-binding", it still matters because:

• It frames negotiations - once you've accepted an economic or control position in the term sheet, it's hard to unwind later.
• Some parts are usually binding - confidentiality, exclusivity/no-shop, costs, and governing law are often intended to be legally enforceable.
• It's used to draft the definitive documents - typically the share subscription agreement, shareholders agreement, and updates to the company's constitution.
• It signals sophistication - a clear term sheet helps the parties move faster and reduces misunderstandings.

For founders, the term sheet stage is where you can accidentally give away control without realising it. For investors, it's where you make sure the commercial risks are addressed before you proceed to full due diligence.

Is A Term Sheet Legally Binding In New Zealand?

It depends on how it's written and what the parties intend.

Many term sheets in NZ are drafted so that:

• Most commercial terms are non-binding (for example, valuation, the amount being invested, and board composition), because the parties still need to negotiate full documents and complete due diligence.
• Specific clauses are binding, such as confidentiality, exclusivity (no-shop), costs, and sometimes dispute resolution and governing law.

However, even where the term sheet says "non-binding", you should still be careful. In New Zealand, whether any part is enforceable turns on contract law principles (including intention to create legal relations and certainty of terms). Labels help, but they're not always the end of the story - and conduct between the parties can also create practical (and sometimes legal) leverage.

Also, a term sheet can create practical pressure. If you've told your team, other investors, or the market that the round is "locked in", it can be hard to walk away even if new terms appear later.

If you're unsure what is actually binding, it's worth getting legal eyes on the draft early - before you sign and before you go exclusive.

What Usually Goes In A Startup Term Sheet?

There's no single standard format, but most term sheets for NZ startups cover the same key buckets: economics, control, and investor protections.

1. The Investment Basics

• Investment amount - how much is being invested and whether it's one tranche or multiple tranches (for example, tied to milestones).
• Instrument - shares now, or something that converts later (like a convertible note or another convertible arrangement).
• Valuation - either pre-money or post-money (this is a common confusion point, so it's worth spelling out clearly).
• Use of funds (sometimes) - broad expectations about what the capital will be used for.

If you're raising on a convertible basis, it can help to document the intended structure early, including the conversion mechanics and what happens at maturity. Depending on what you agree, you might later implement this using a Convertible Note. Some startups also use "SAFE-style" documents; however, SAFE notes aren't a standard New Zealand concept and the right structure can depend on NZ company law and financial markets rules (including the Financial Markets Conduct Act), so it's important to get advice on the appropriate NZ form. For reference, see our SAFE Note guide.

2. Capital Structure And Ownership

• Option pool / ESOP - whether a pool is being created or topped up, and whether it comes out of the pre-money (often founder-unfriendly) or post-money (often investor-unfriendly) valuation.
• Share classes - ordinary shares vs preference shares, and what rights attach to each.
• Founders? holdings - whether founders are expected to be subject to vesting or transfer restrictions.

Founders are often surprised that term sheets can include requirements around future equity arrangements (like employee incentives). It's much easier to negotiate these at the term sheet stage than after you've agreed a valuation and gone exclusive.

3. Governance And Control

• Board composition - who gets a board seat, whether there's an independent director, and how deadlocks are handled.
• Voting thresholds - whether certain decisions need a special majority or a specific investor's approval.
• Information rights - what reporting investors get (monthly metrics, quarterly accounts, annual budgets, etc.).

This is where founders need to be particularly careful. You can keep most of your shares and still lose practical control if the governance settings are too investor-heavy.

4. Investor Protections

• Reserved matters - a list of actions the company can't take without investor consent (for example, issuing new shares, taking on debt above a threshold, changing the business model, selling key IP, or hiring/firing senior executives).
• Pre-emptive rights - investors? rights to participate in future rounds to maintain their ownership percentage.
• Anti-dilution - protections if future shares are issued at a lower price (down round).

These protections are not inherently "bad" - they're often reasonable risk management - but the scope and thresholds matter a lot in practice.

5. Exit And Liquidity Terms

• Liquidation preference - who gets paid first if the company is sold or wound up.
• Drag-along and tag-along - whether majority shareholders can force a sale (drag), and whether minority shareholders can join a sale (tag).
• IPO or trade sale expectations (sometimes) - usually high-level, but it sets alignment.

Exit terms can dramatically change the "real" economics of a deal. Two term sheets with the same valuation can deliver very different outcomes depending on liquidation preferences and participation rights.

Key Term Sheet Clauses Founders Should Pay Close Attention To

A term sheet can be deceptively short, so it's tempting to skim and focus only on valuation. In reality, founders should zoom in on the clauses that affect control, future fundraising, and what happens if things go wrong.

Valuation Mechanics (Pre-Money vs Post-Money)

"$X valuation" means very little unless it's clear whether it's pre-money or post-money, and how the option pool is treated.

If you're unsure, ask for a cap table example. A one-page table showing ownership "before" and "after" can prevent a lot of dispute later.

Liquidation Preference

Liquidation preference determines who gets paid first on an exit. It's commonly expressed as a multiple (for example, "1x") and may be:

• Non-participating - investor gets either their money back first or their pro-rata share, whichever is higher.
• Participating - investor gets their money back first and then also participates in the remainder (this can heavily reduce founder outcomes).

This term can have a bigger impact than the headline valuation, especially if the company sells for a modest amount.

Reserved Matters And Veto Rights

Reserved matters protect investors from the company making major changes without them. That said, if the list is too broad (or the thresholds are too low), it can make running the business slow and frustrating.

As a founder, you want clarity on:

• what actions need investor consent;
• what the financial thresholds are (e.g. "debt above $50,000"); and
• whether consent is required from one investor or a group/class of investors.

Founder Vesting And "Good Leaver / Bad Leaver"

Investors often want founders to earn their equity over time (vesting), especially where the company is early stage and heavily reliant on the founders continuing to build it.

This can be reasonable - but the details matter, including:

• the vesting period (often 3?4 years);
• any cliff (for example, nothing vests until 12 months);
• what counts as a "good leaver" vs a "bad leaver" (resignation, termination, illness, dispute, etc.); and
• what price applies if shares are bought back (fair value vs nominal value).

These concepts are usually implemented later through the transaction documents and equity arrangements (and sometimes supported by a Share Vesting structure).

Exclusivity / No-Shop

Term sheets often include an exclusivity period where you agree not to seek or negotiate alternative funding offers.

This can help investors justify spending time on due diligence - but it also creates risk for you if the deal drags or the investor re-trades key terms later.

Founders should negotiate:

• a short and realistic exclusivity period;
• clear expectations around timing for due diligence and documents; and
• an ability to re-engage other investors if deadlines aren't met.

How A Term Sheet Flows Into The "Real" Legal Documents

After the term sheet is signed, the parties typically move into due diligence and the longer-form agreements. For many startups, the core suite includes:

• a share subscription or share purchase agreement (depending on whether new shares are issued or existing shares are sold);
• a shareholders agreement; and
• updates to the company constitution (or adoption of one, if the company doesn't already have a constitution that fits the deal).

In NZ, these documents often work together like this:

• The share subscription agreement documents the investment mechanics (how many shares, price, completion conditions, warranties, and completion steps). If your transaction involves issuing shares to the investor, this typically aligns with a Company Issue Of Shares process.
• The shareholders agreement sets the relationship rules between shareholders, including governance, transfer restrictions, reserved matters, dispute resolution, and exit rights. Many founders implement this via a Shareholders Agreement.
• The company constitution sets rules that can bind shareholders under the Companies Act framework, and can be important for share classes, pre-emptive rights, and director powers. It's common to update or adopt a Company Constitution alongside a funding round.

If you're raising funds from multiple investors, you may also need additional documents (for example, deeds of accession so new investors "join" the shareholders agreement, IP assignments, or employment/contracting documentation for key team members).

And once you start scaling and collecting more customer or user data, it's smart to ensure your external documents keep pace too - for example, a Privacy Policy that reflects what data you collect and how you use it.

Common Term Sheet Mistakes (And How To Avoid Them)

Term sheets move quickly, and that's part of their appeal. But speed is also where mistakes happen.

1. Treating The Term Sheet As "Just A Formality"

If you accept a term sheet thinking you'll "sort it out in the long-form documents", you may find the other side says: "But we already agreed that in the term sheet."

Even if it's non-binding, it's still a strong record of what you said yes to.

2. Not Clarifying What's Binding

It should be crystal clear which clauses are binding (and for how long), especially:

• confidentiality;
• exclusivity/no-shop;
• costs and who pays them; and
• governing law and dispute resolution.

3. Not Stress-Testing "Control" Terms

Founders often focus on valuation and dilution, but day-to-day reality is shaped by governance:

• Who controls the board?
• How many decisions require investor consent?
• What reporting do you have to provide?

A useful rule of thumb: if you need investor approval for routine operational decisions, you'll feel constrained very quickly.

4. Leaving Future Funding Ambiguous

Your term sheet should play nicely with future rounds. Watch out for:

• overly aggressive anti-dilution rights;
• unrealistic investor veto rights on future fundraising; and
• pre-emptive rights that are hard to administer.

A good deal is one you can build on.

5. Forgetting The Human Side Of "Founder Leaver" Clauses

Founder leaver provisions aren't just legal mechanics - they affect what happens if a founder burns out, becomes ill, has a family emergency, or there's conflict within the team.

Try to define leaver scenarios fairly, so the business is protected without putting founders in an impossible position.

Key Takeaways

• A term sheet sets out the key commercial terms of a startup investment and often shapes the entire deal, even if it's described as "non-binding".
• In New Zealand, term sheets commonly include a mix of non-binding commercial terms and binding clauses like confidentiality, exclusivity, and costs.
• Founders should look beyond valuation and focus on control and protection terms like reserved matters, board rights, liquidation preferences, and founder vesting.
• After signing a term sheet, the deal usually progresses into full documents such as a share subscription agreement, a Shareholders Agreement, and a Company Constitution update.
• Common mistakes include treating the term sheet as a formality, not clarifying what's binding, and accepting investor veto rights that make the business hard to run day-to-day.
• Getting the term sheet right early helps you move faster, avoid costly renegotiation later, and build a funding structure that supports growth.

If you'd like help reviewing or negotiating a term sheet (whether you're a founder raising capital or an investor making an investment), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.