USE CASE · US VENTURE CAPITAL
The US investor has sent a term sheet. What do these terms mean for us?
A term sheet from a US investor can set out the key financial terms of a funding round in just a few pages. In addition to valuation and equity stake, liquidation preference, option pool, anti-dilution provisions, founder vesting and control rights can shape the founders’ position in the long term.
We support start-ups and technology companies from German-speaking countries in their funding rounds with US venture capital firms, corporate venture funds and strategic investors. Matthias Schuhmacher and Raphael Tautz coordinate the support; the US corporate team provides assistance with US market standards and contract negotiations.
The case at a glance
Background
A US investor has submitted a term sheet or proposed specific terms for investment.
Objective
Understand the financial and compliance implications before signing, and identify the key points for negotiation.
Support
German-speaking US lawyers review the terms and coordinate the negotiations with the US investor and the German advisers.
Your situation
US term sheets use terms and mechanisms that originate from US venture capital practice. A high valuation can be put into economic perspective if, at the same time, a large pre-money option pool, a far-reaching liquidation preference or strong anti-dilution rights are agreed.
Governance arrangements also merit early consideration. Board or observer rights, information rights and approval clauses can give the investor influence that extends beyond their mere shareholding. Many of these points are difficult to renegotiate in principle once the term sheet has been signed.
Our support
We review the term sheet from the perspective of US venture capital practice and explain which clauses are standard in the market, where there is room for negotiation, and which provisions may be particularly relevant to founders or existing shareholders.
Where necessary, we calculate the financial impact of individual clauses based on specific financing and exit scenarios and assist with coordination with the investor or their US counsel. The implementation under German company law is coordinated with the relevant German advisers.
Check the US term sheet before signing
Please send us the term sheet and the current cap table. We will clarify the key financial and legal points and discuss which issues need to be addressed before signing.
Assessing the US term sheet from an economic and legal perspective
The key points often lie not in any single clause, but in the interplay between valuation, dilution, exit economics and investor rights.
Valuation, option pool and dilution
Understanding the actual stake after the round.
In addition to pre-money and post-money valuations, the way in which a new or expanded option pool is treated is crucial. If it is established prior to the investment, the resulting dilution may, from a financial perspective, primarily affect the existing shareholders.
We review the cap table, option pool and ownership structure together and explain how the proposed funding round will affect the founders and existing investors.
Liquidation Preference and Exit Economics
Run through the distribution of the proceeds from the sale in advance.
Liquidation preferences determine whether, and to what extent, the investor is entitled to a preferential share of the proceeds in the event of an exit. Differences between participating and non-participating structures, or between single and multiple preferences, can be significant where exit values are low.
We will analyse the clause and examine its impact in conjunction with conversion, seniority and other exit provisions.
Investor Rights and Governance
Examine how rights of access and information interact.
Board seats, observer rights, protective provisions and information rights may affect the company’s freedom of action. Particularly relevant are conditions requiring prior approval for financing, M&A, budgets, material contracts or IP transactions.
We assess whether the rights requested are appropriate for the scope of the investment and the specific funding round, and which points should be taken into account for future rounds.
Founder Vesting, Anti-Dilution and Follow-on Rounds
Take into account the long-term implications for founders and future rounds of funding.
Founder vesting may also be newly introduced in companies that have been in existence for some time. Anti-dilution provisions, on the other hand, affect the distribution of shares in subsequent down rounds. Pro-rata rights can determine the extent to which an investor can maintain or increase their stake in subsequent rounds.
We do not view these mechanisms in isolation, but in the context of the company’s development to date and its expected future funding.
Your points of contact
Dr Raphael Tautz and Matthias Schuhmacher coordinate German-language support and liaise with the US Corporate Practice. Oded Kadosh and Benjamin Waltuch, in particular, can be brought in to handle the US side of the transaction.
Partner · STEM Practice Group
Your contact in Munich
Partner · STEM Practice Group
Your contact in Munich
Frequently Asked Questions
Ideally, before signing. Even though many provisions are worded in a non-binding manner, the term sheet usually sets out both parties’ commercial expectations for the subsequent contract documentation.
Put simply, it sets out the amount an investor receives in the event of certain exit scenarios, before or at the same time as proceeds are distributed to the other shareholders. The specific terms of this provision can significantly alter the distribution of proceeds.
An additional option pool may dilute the existing shareholders’ stakes. A key factor is whether the increase is included in the valuation before or after the investment.
These provisions can protect an investor from having to pay lower prices in subsequent funding rounds. The financial impact depends on the specific calculation method and the agreed exceptions.
Yes. We can discuss the economic and contractual issues specific to the US directly with the investor or their legal advisers and coordinate the implementation with the German advisers.
Further information
Corporate & Transactions
Company law, venture capital and US-related transactions.
US Investor Due Diligence + IP Ownership Review
Preparing for legal and IP due diligence by a US investor.
Primary sources / Legal basis
Selection of primary and original sources particularly relevant to this use case:
German 
English (United States) 
English (UK)