Standard Investment Documents: The Term Sheet

Last week we announced a new project: Standard Investment Documents for founders in Italy. If you missed it, check out the article here.

In short, we joined forces with leading law firm BonelliErede on a set of investment documents that reflect how we want to do deals: faster, fairer, and more accessible.

Today, we are unveiling our Standard Term Sheet. But you might be wondering: “What even is a Term Sheet, and why should I care”? In this article I will go over what the Term Sheet is, why it’s important, and why we think standardizing it is beneficial to everyone. If you want to skip straight to reading the document, you can do so on our website!

The Term Sheet is a short, non-binding document that summarizes the key terms and conditions of a proposed investment before the parties (founders + VCs) move on to drafting the full legal documentation. Think of it as a "handshake on paper": it captures the essential economics (valuation, amount invested, type of security) and the main terms + governance rights (board composition, information rights, veto rights, liquidation preference) that both the founders and the investors have agreed to in principle. Because it's non-binding, it doesn't commit either side to closing the deal, but it does set the framework and expectations for the definitive agreements that follow.

The Term Sheet sets the tone for the entire investment process. Even though it's non-binding, it anchors the negotiation on the terms that will later be written into binding legal documents (which we will share in the coming weeks!). A clear, well-structured Term Sheet helps founders and investors align quickly on the deal's core economics and governance, avoiding drawn-out back-and-forth over points that are, in most cases, market standard. It also acts as a filter: if the parties can't agree on the fundamentals at this stage, it's far better to find out before lawyers spend hours (and you $$$) drafting definitive agreements. In short, a good Term Sheet keeps negotiations fast and focused, which is exactly what founders need when they're trying to close a round and get back to running their company.

Now that we've covered the "what" and the "why," let's go through the clauses that matter most. We'll group them the way founders usually think about them: the economics, who controls what, and the protections built in for both sides.

The investment amount and valuation are usually the first thing founders focus on, and they are very important. But I’d argue what matters more is the total dilution the round creates, and whether that dilution is fair to both founders and existing investors. A useful benchmark: most rounds dilute you somewhere between 15 and 20%. Where you land depends on your leverage. Strong traction and competing offers let you give up less, a harder raise usually costs more. The point is to check that your dilution is in line with the market, not just that the valuation number looks nice.

The mechanics behind that number are also relevant. The valuation should always include any preceding financing or shareholder loans, and it should be calculated on a fully diluted basis (meaning it accounts for all shares that could exist, including options not yet granted). Otherwise you end up arguing later about what your real ownership actually is.

The ESOP, or Employee Stock Option Pool, is a pool of shares set aside to grant to future employees as part of their compensation, usually to attract and retain key hires. Be sure to have clear whether the pool is created before or after the round closes.

If the pool is created pre-round (as it is in our term sheet, at 5 to 10% of the company), the dilution to fund it comes only out of the founders’ and existing shareholders’ shares. This is usually the most common case. The new investor buys in after the pool already exists, so their percentage is untouched. If instead the pool is created post-round, for any specific reason or negotiations, everyone gets diluted, new investor included.

This is where founders often push back the hardest. But it’s worth knowing that Investor protections through majority voting on certain decisions (listed in Annex 1) and board-level approval rights (Annex 2) aren’t about investors running your company day to day. They exist to protect a minority shareholder from decisions that could seriously harm their investment: things like selling the company, taking on major new debt, or winding down the business. These lists are standard across almost every priced venture round globally, so negotiating them line by line usually just costs time without changing the outcome. And this is especially true at pre-seed or seed. Just ask our portfolio founders.

The board seat works the same way. It gives the investor visibility into how the company is doing and a say on major strategic decisions. It does not give them control over daily operations. Founders keep running the company; the board’s approval rights are deliberately limited to significant financial and strategic decisions above certain thresholds.

Anti-dilution protection kicks in if the company later raises money at a lower valuation than the current round (known as a “down round”). Without this protection, an investor’s ownership stake would get unfairly diluted just because the company’s value dropped. The version used here, called “weighted average broad-based,” is one of the more founder-friendly versions available on the market. It adjusts the investor’s position modestly rather than through a full-ratchet mechanism, which is a much harsher method that would fully protect the investor’s original price at the founders’ expense.

The liquidation preference determines who gets paid first, and how much, if the company is sold or liquidated. A “1x non-participating” preference means investors get their original investment back first, before other shareholders receive anything, but they don’t also get an additional share of what’s left over on top of that. “Pari passu” simply means that if there are multiple investors with this preference, they all get paid at the same time and on equal footing, rather than in a specific order. This structure is widely considered one of the fairest for both founders and investors, which is why we apply it as standard in our deals.

These three clauses all exist for the same basic reason: investors are betting on the founding team staying with the company and seeing it through. A lock-up period (3 years here) restricts founders from selling their shares during that time, with a small carve-out (2%) that stays free of this restriction. Reverse vesting means that even though founders already own their shares, those shares only become fully and permanently theirs gradually over time, in this case over 4 years, on a quarterly basis. If a founder leaves early, they may lose the unvested portion, depending on whether they’re considered a “good leaver” (leaving under acceptable circumstances) or a “bad leaver” (leaving under circumstances like misconduct).

Very important on reverse vesting: it mostly protects founders from each other’s choices down the line. You should really just implement cliff + vesting even before any investor comes in. And I suggest to have it even longer. I dare you: 6 years vesting with 4 years cliff ;) Prove that you’re all in with each other.

The management agreement covers exclusivity (founders working full-time for the company), non-compete provisions, and the assignment of all intellectual property created by founders to the company. None of this should feel unusual. It’s what any serious investor expects, and it’s also good practice for founders themselves. It protects the company, and everyone in it, from a scenario where a co-founder walks away early while keeping equity they never fully earned.

The last group of clauses is about keeping the process moving efficiently. Exclusivity (30 days from signing) means the company agrees not to negotiate with other investors while IFF completes due diligence, in exchange for the speed and clarity the term sheet is meant to provide (tbh it’s much shorter than that). Confidentiality keeps the terms private while the deal is being finalized, since sharing them broadly could create complications with other parties. The 5-business-day acceptance window exists for a simple reason: term sheets that sit unsigned for weeks tend to fall apart, as circumstances change and momentum is lost. Fast decisions tend to be better for founders and investors alike.

Taken together, none of these clauses are unusual or unique to IFF. They reflect what is standard in venture financing around the world, and what we’ve seen work well in practice in different ecosystems. By publishing them clearly, together with BonelliErede, our goal is simple: help founders spend their negotiating energy on the few points that are genuinely specific to their deal, like valuation, amount, and certain thresholds, and skip the weeks of back and forth on terms that, in most cases, aren’t worth negotiating.

Faster term sheets mean faster closings, and less time spent in legal back-and-forth. That’s more time for founders to do the actual work of building, which is the whole point.

At IFF we aim to do things at the best of our capabilities, but we’re far from perfect. If there’s anything in this Term Sheet that you think should be reviewed, we are very open to do it. We’re super curious to receive your feedback and ways you think we can improve the way we work with founders.

Thank you for reading, and see you in two weeks with the ESOP documents!

Cheers 🖖

-Ire