A term sheet is the document that defines the commercial terms of an equity investment — before any legally binding documents are signed. It covers valuation, ownership, governance, economic rights, and exit provisions. What appears to be a short summary document carries significant long-term consequences: the terms agreed in the term sheet become the foundation of the shareholders' agreement and investment documents. Founders and business owners who sign term sheets without fully understanding or negotiating their provisions often find themselves locked into arrangements that constrain future flexibility, dilute their economic rights, or create exits on terms they did not anticipate. This guide explains the key provisions in a UAE equity investment term sheet and what to watch for.
The pre-money valuation is the value attributed to the company before the new investment is made. The post-money valuation equals the pre-money valuation plus the investment amount. The investor's ownership percentage equals the investment amount divided by the post-money valuation.
Example: If the pre-money valuation is AED 100 million and the investor invests AED 25 million, the post-money valuation is AED 125 million and the investor owns 20% of the company (AED 25M ÷ AED 125M). Negotiating the pre-money valuation is the most straightforward way to reduce dilution.
Liquidation preferences define how proceeds are distributed in a liquidity event (sale, IPO, or winding up). Key provisions:
Anti-dilution provisions protect investors if the company raises future capital at a lower valuation (a down round). Key types:
A: A cap table (capitalisation table) is a spreadsheet showing all shareholders and their ownership stakes, including any options, warrants, or convertible instruments that would convert to equity. It is the foundation for modelling the dilution impact of any new investment. Before signing a term sheet, model the fully diluted cap table post-investment — including any option pool that the investor requires to be created — to understand exactly what percentage each founder will own after the round closes. The headline pre-money valuation does not tell you this; only the cap table does.
A: A pre-emption right (also called a right of first refusal or pro-rata right) gives existing investors the right to participate in future fundraising rounds on a pro-rata basis, to maintain their ownership percentage. This is standard and reasonable. However, investors sometimes seek a right of first offer — the right to be offered the entire future round before any other investor is approached. This is more constraining and can complicate competitive investor processes in future rounds.
A: In priority order: pre-money valuation (determines your ownership percentage); liquidation preference structure (participating vs non-participating has the biggest impact on founder economics in a sale); option pool size and timing (investors often require an option pool to be created pre-investment, which dilutes founders before the round, not investors — the timing of option pool creation is a significant but often overlooked negotiating point); and reserved matter thresholds (higher thresholds give management more operational flexibility without seeking investor consent).
A: Rejecting a term sheet — particularly after significant investor due diligence — damages the relationship with that investor and may affect your reputation in the investor community if handled poorly. The right approach is to engage professionally with the specific points you want to negotiate, propose alternative terms with clear rationale, and demonstrate that you understand the investor's perspective even while disagreeing on specific provisions. A well-managed negotiation of a term sheet that both parties ultimately accept builds a stronger foundation for the investment relationship than either accepting everything or walking away.
Related reading: shareholders' agreement essentials — how term sheet provisions translate into binding legal documentation; equity dilution — modelling the cap table impact of the terms being proposed; investor partner benefits — evaluating what the investor brings beyond the cheque before accepting any terms.
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