What is a Founders Term Sheet? (2026 Updated)

If you’re building a startup with one or more co-founders, you’ve probably had that moment where everything feels exciting… and slightly risky.

You’re moving fast, you’re making big calls, and you’re relying heavily on trust. That’s exactly why a founders term sheet can be so useful: it helps you get aligned early, before you’re under pressure from investors, deadlines, or disagreements.

This guide is updated to reflect current startup practices and expectations, including how founders are documenting roles, equity, and decision-making earlier (and more clearly) than ever.

Let’s break down what a founders term sheet is, what it usually covers, and how you can use it to build stronger legal foundations from day one.

What Is A Founders Term Sheet?

A founders term sheet is a short, plain-English document that sets out the key commercial terms agreed between the founders of a business.

Think of it as the “big picture” agreement that answers the questions founders usually avoid until later, like:

• Who owns what (and how much)?
• What happens if someone leaves?
• Who makes decisions day-to-day?
• What are each founder’s roles and responsibilities?
• How will money be raised and how will dilution work?

It’s often used as a stepping stone toward more detailed documents, like a Founders Agreement or a Shareholders Agreement.

Is A Founders Term Sheet Legally Binding In NZ?

It depends on how it’s drafted and how you use it.

In New Zealand, a term sheet can be legally binding (fully or partially) if it shows clear intention to create legal relations and has sufficiently certain terms. But many founders term sheets are drafted as:

• Non-binding overall (a roadmap for future documents), with
• Some clauses binding (like confidentiality or exclusivity)

This is one of those areas where being “casual” can backfire. If you don’t clearly label what is binding and what isn’t, you can accidentally create enforceable obligations, or end up with terms that are too vague to rely on when things go wrong.

If you’re unsure, it’s worth getting a lawyer to sanity-check your term sheet before you start acting on it (especially if you’re already spending money or building IP).

Why Use A Founders Term Sheet (Instead Of Jumping Straight To A Full Agreement)?

Founders often skip paperwork early because they’re trying to keep momentum. That’s understandable. But “we’ll sort it out later” usually turns into “we’re sorting it out during a crisis”.

A founders term sheet is useful because it:

• Forces the right conversations early, while you still like each other and your business is flexible
• Clarifies expectations (so no one feels blindsided later)
• Helps with investor readiness, because investors will ask about equity, vesting, and founder commitments
• Speeds up drafting later, because your lawyer can turn agreed “heads of terms” into a proper agreement efficiently

A Common Scenario: “We’re Equal Co-Founders”… Until We Aren’t

Many startups start with a simple plan: “Let’s split it 50/50.”

Then one founder takes on fundraising, another builds the product, and another goes back to a full-time job “temporarily”. Suddenly, the “equal” split doesn’t feel equal at all.

A founders term sheet helps you document what “equal” means in practice, and what happens if contributions change over time.

What Should A Founders Term Sheet Include?

There’s no one-size-fits-all template (and generic templates are risky), but most founders term sheets in NZ cover the same core areas.

Here’s what you’ll typically want to include.

1) The Business Basics

• Business name (and whether you’ll operate under a company or other structure)
• What the business does (short description)
• Who the founders are (legal names, addresses, and roles)

If you’re setting up a company, it’s also a good time to think about your Company Constitution and whether you need one from the start (many startups do, especially if there will be multiple shareholders and future investment).

2) Equity Split And Capital Structure

This is usually the heart of the term sheet. It covers:

• Ownership percentages (e.g. Founder A 60%, Founder B 40%)
• Number of shares (if a company structure is used)
• Any founder loans already contributed (and whether they’re repayable)
• Whether contributions are cash, time, IP, or a mix

Be careful here: founders sometimes agree to an equity split without dealing with what happens when new shares are issued later (for example, when raising investment or setting aside an employee option pool). Your term sheet doesn’t need to solve everything, but it should flag how you’ll approach these decisions.

3) Vesting (So Equity Is Earned Over Time)

Vesting is one of the most important protections in founder arrangements.

It usually means a founder’s equity is earned over time (for example, monthly over 3–4 years), rather than being locked in from day one. This helps protect the business if a founder leaves early.

Common vesting terms include:

• Vesting period (often 3–4 years)
• Cliff (often 6–12 months, meaning nothing vests until the cliff is reached)
• Good leaver / bad leaver outcomes (what happens to unvested shares if someone leaves)

Vesting is usually implemented through a more formal document like a Share Vesting Agreement (or integrated into a shareholders agreement), but a term sheet is a good place to lock in the commercial intent.

4) Roles, Responsibilities, And Time Commitment

This section is about avoiding resentment later.

You can keep it simple, but it should cover:

• Each founder’s role (e.g. CEO, CTO, Head of Sales)
• Expected time commitment (full-time, part-time, evenings/weekends)
• Authority (who can sign contracts, hire people, spend money)
• Performance expectations (at a high level)

If founders will also be employees of the business, you may eventually need an Employment Contract to clearly document pay, duties, IP ownership, and termination processes. (It can feel odd to “employ” a founder, but it’s often the cleanest way to document expectations.)

5) Decision-Making And Voting

Even early-stage startups need a way to make decisions without deadlocks.

Your term sheet can cover:

• Founder voting power (is it proportional to equity, or equal votes?)
• Reserved matters (decisions requiring all founders’ approval)
• Day-to-day authority (what decisions one founder can make alone)
• Board structure (if relevant)

Reserved matters often include raising capital, issuing shares, taking on debt, entering major contracts, or changing the business model.

6) IP Ownership (And Protecting What You’re Building)

If your startup is building software, a brand, content, training material, designs, or a platform, intellectual property (IP) will likely be one of its most valuable assets.

A founders term sheet should clarify (at least at a high level):

• Who owns IP created before the business started
• Whether that IP is assigned or licensed into the business
• Who owns IP created during the startup phase

If you don’t document this properly, you can end up in a messy situation where a founder technically owns core code, branding, or content personally, even though the business is using it.

7) Founder Exits: What Happens If Someone Leaves?

This is the part everyone hopes they’ll never need, but it’s often the part that saves the business.

Your term sheet can set the “rules of the road” for:

• Resignation (voluntary exit)
• Removal (for misconduct or failure to meet commitments)
• Equity treatment (especially for unvested equity)
• Share transfers (can a founder sell shares to an outsider?)
• Valuation approach (how shares are priced if bought back)

Later, these concepts usually get formalised into shareholder transfer mechanisms and buy-sell clauses.

8) Confidentiality And Restraints (In A Practical Way)

Startups move quickly, and founders often share sensitive information with contractors, advisors, and potential investors.

Your term sheet may include a confidentiality commitment between founders, especially if you haven’t signed a separate NDA yet.

Some term sheets also include non-compete or non-solicitation principles. In NZ, restraints need to be reasonable to be enforceable, so it’s important to get drafting right and keep it proportionate to what you’re protecting.

9) Funding And Next Steps

Your founders term sheet can also outline the plan for:

• Initial funding (who is contributing what now)
• Future capital raises (how you’ll approach new investors)
• Employee incentives (whether you’ll create an ESOP pool)
• Timeline for converting the term sheet into formal documents

This section matters because it turns the term sheet from “nice ideas” into an action plan.

How Is A Founders Term Sheet Different From A Shareholders Agreement Or Constitution?

It’s easy to mix these documents up, especially when you’re in early-stage mode. Here’s the practical difference.

Founders Term Sheet

• Typically shorter and more commercial
• Used to align founders early
• Often non-binding or partly binding
• Often used as drafting instructions for a formal agreement

Shareholders Agreement

• Detailed, legally enforceable document between shareholders
• Sets out governance, exits, share transfers, dispute processes, and protections
• Commonly used when there are multiple shareholders (especially with investors)

Many startups move from a term sheet to a formal Shareholders Agreement once equity is issued and the business is properly operating.

Company Constitution

• A company document that sets internal rules under the Companies Act framework
• Often covers share rights, director powers, and procedural matters
• Can help support smoother governance and future fundraising

Depending on your goals, you may adopt a Company Constitution early, especially if you’re issuing different share classes later or want clearer governance from the start.

Common Mistakes Founders Make With Term Sheets (And How To Avoid Them)

A founders term sheet should reduce risk, not create new confusion. Here are some common pitfalls we see.

Being Too Vague On Equity And Vesting

If you don’t define vesting clearly, it’s hard to unwind equity when a founder leaves. That can scare off investors and create long-term resentment.

Even if you’re not finalising all details, set out the core intent (vesting period, cliff, what happens on exit) so you’re aligned.

Not Dealing With IP Early

If founders start building software, content, or branding without documenting who owns it, you can end up with IP sitting in the wrong place. Fixing it later is often more expensive and stressful.

Accidentally Creating A Binding Agreement

Founders sometimes copy a template, sign it, and treat it casually. But if the document looks like an agreement and you act as if it’s an agreement, it may be enforceable (or at least create legal arguments you don’t want).

Make it explicit what is binding and what isn’t, and keep the drafting consistent with that intention.

Ignoring The “What If Someone Leaves?” Conversation

This is the one founders avoid the most, but it’s also one of the biggest sources of startup disputes.

It’s not pessimistic to plan for it. It’s professional.

Trying To DIY The Legal Documents

A term sheet is a great start, but it’s rarely the end of the legal work.

Once you’re confident you’re aligned, it’s usually worth having your lawyer convert it into formal documents tailored to your business (rather than relying on generic online templates that don’t reflect your structure, IP, or risk profile).

Key Takeaways

• A founders term sheet is a practical document that captures the key commercial terms between founders early, including equity, roles, governance, and what happens if someone leaves.
• A term sheet can be non-binding or partly binding in New Zealand depending on how it’s drafted, so it’s important to clearly label and structure it to match your intentions.
• Strong founders term sheets usually cover equity splits, vesting, decision-making, IP ownership, confidentiality, and founder exit scenarios, so there are fewer surprises later.
• A founders term sheet is often a stepping stone to more formal documents like a Founders Agreement, Shareholders Agreement, Share Vesting Agreement, and (for companies) a Company Constitution.
• Getting these founder arrangements right from day one can save you major stress later, especially when you start raising capital, bringing in employees, or scaling the business.

If you’d like help putting together a founders term sheet or turning agreed terms into the right documents for your startup, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.