What a term sheet is, and how binding it is under Dutch law
A term sheet, sometimes called a letter of intent, is a summary of the deal. It records the amount to be invested, the pre-money valuation, the share class the investor will take, and the economic and control terms that will be written into the deed of issue, the amended articles of association and the shareholders’ agreement. It is not the investment itself.
The clauses that do bind you
Three provisions are normally carved out and made binding on signature. The first is exclusivity, often called a no-shop: for a defined period you may not solicit or negotiate with other investors. This is the clause that costs founders most, because it removes competitive tension at the precise moment due diligence gives the investor leverage. Negotiate the period down, define carefully what counts as soliciting, and make sure the exclusivity ends automatically if the investor withdraws or materially changes the terms.The second is confidentiality, which usually runs both ways and covers the existence of the negotiations as well as the information exchanged. The third is the costs provision: who pays the legal and due diligence costs, and whether the company carries the investor’s costs if the deal completes, if it does not, or in both cases. A cap on those costs belongs in the term sheet, not in a later discussion.Walking away is not always free
Dutch law governs the negotiating phase itself. Parties in negotiation must behave towards each other according to standards of reasonableness and fairness, and the Supreme Court applies a strict but real standard: breaking off negotiations may be unacceptable where the other party could justifiably trust that some contract would result, or in the light of the other circumstances of the case. Where that threshold is met, the party that walked away can be liable for the costs the other incurred and, exceptionally, for lost profit.The practical consequence is not that a term sheet locks you in. It is that the further negotiations have advanced and the more concrete the commitments exchanged, the harder it becomes to withdraw for reasons that look opportunistic. Record clearly in the term sheet which conditions still have to be satisfied, including satisfactory due diligence, investment committee approval and completion of the definitive documentation, so that a later withdrawal rests on a condition both sides agreed to rather than on a change of mind.Liquidation preference: who gets paid first
Liquidation preference determines the order and the size of the payouts when the company is sold or wound up. It is the single clause with the greatest effect on what founders actually receive, and it operates independently of the headline valuation. A one times non-participating preference means the investor receives at least the amount invested before the ordinary shareholders receive anything.
Non-participating and participating preference
With a non-participating preference the investor chooses. Either they take the preference amount and stop there, or they give it up, convert to the ordinary position and share in the proceeds according to their percentage. They will take whichever is worth more, which means that in a strong exit the preference costs the founders nothing at all, and in a weak exit it protects the investor’s capital. This is the market standard for a healthy round and the structure founders should be aiming for.With a participating preference the investor does not choose. They take the preference amount off the top and then also share in what remains according to their percentage. This is the structure commonly described as double dipping, and it takes money out of the founders’ and employees’ pockets in every scenario except a very large exit, where the effect fades because the preference is small relative to the total.What the difference looks like in figures
Take an investor who puts in two million euro for twenty per cent of the company, and a later sale for ten million euro.With a one times non-participating preference, the investor compares two million against twenty per cent of ten million, which is also two million. Either way they receive two million and eight million is left for everyone else.With a one times participating preference, the investor first takes two million off the top. Eight million remains, and the investor takes twenty per cent of that as well, a further 1.6 million. Their total is 3.6 million and only 6.4 million is left for the founders and the team. The single word participating moved 1.6 million across the table.The multiple matters as much as the participation. A two times preference doubles the amount that comes off the top before anyone else is paid, and in a modest exit it can consume the entire proceeds. If an investor insists on participation, the usual compromise is a cap: participation stops once the investor has received a stated multiple of the amount invested.Preference stacking across rounds
Founders often model the effect of a single round and forget that preferences accumulate. Each new round adds its own preference, and the term sheet will say whether the new investor ranks ahead of the earlier ones or alongside them. Stacked preferences, where the most recent round is paid first, are common and are worth negotiating consciously; pari passu, where all preferred shareholders are paid at the same time and pro rata if there is not enough to go round, is more even-handed. By a Series B a company can easily carry more preference than it is worth in a disappointing exit, which is precisely how founders end up with nothing after a sale that looked like a success in the press.Anti-dilution: what happens in a down round
Anti-dilution protects an investor against a later round priced below the one they paid. If a subsequent round is issued at a lower price per share, the clause compensates the earlier investor by adjusting the price at which their shares convert, or by issuing them additional shares, so that part of the loss is shifted to the ordinary shareholders. It does not protect against ordinary dilution from a round priced higher, which is normal and which everyone accepts.Two mechanisms dominate. Broad-based weighted average is the standard and the one to insist on. It recalculates the earlier investor’s price using a formula that takes account of all outstanding shares and of how many new shares are actually issued at the lower price, so the adjustment is proportionate to the size of the down round. A small down round produces a small adjustment.Full ratchet is the aggressive version. It reprices the earlier investor’s entire holding to the new, lower price regardless of how few shares are issued at that price. A tiny down round can therefore trigger an enormous transfer of ownership away from the founders and the option pool. Full ratchet also creates a perverse incentive, because it makes the protected investor relatively indifferent to a low price in the next round. If it appears in a term sheet, treat it as a point to be traded away rather than a detail.Watch the exceptions as well. Anti-dilution should not be triggered by share issues that everyone agreed to in advance: shares issued under the employee option pool, shares issued on the exercise of options or convertibles already outstanding, shares issued in an acquisition, and shares issued to a bank or lessor. Those carve-outs belong in the term sheet.Founder vesting in a Dutch bv
Vesting ties a founder’s equity to their continued involvement. The market standard is four years with a one-year cliff: nothing is earned in the first twelve months, twenty-five per cent is earned on the first anniversary, and the remainder accrues in monthly instalments over the following thirty-six months. Investors expect it, and existing founders benefit from it too, because it is the mechanism that stops a departing co-founder from keeping a founder-sized stake while others build the value.The Dutch implementation differs from the American one, and this is where imported term sheets cause trouble. Shares in a bv cannot be issued or transferred informally: under article 2:196 of the Dutch Civil Code the transfer of a share requires a deed executed before a civil-law notary established in the Netherlands. A founder therefore normally holds all of their shares outright from the start, and the vesting is achieved by an obligation to offer shares back. Article 2:192 of the Dutch Civil Code allows the articles of association to attach obligations and requirements to shares, including an obligation to transfer shares in defined circumstances, and the shareholders’ agreement sets out the price at which that transfer happens.Good leaver and bad leaver
Because the mechanism is a compulsory offer rather than a forfeiture, the negotiation is about price. A good leaver, typically someone who leaves through illness, death, or dismissal by the company without a cause attributable to them, offers their unvested shares at fair market value or at a formula price. A bad leaver, typically someone who resigns early or is dismissed for urgent cause, offers at nominal value or at the price they paid.Two points repay attention. First, the definitions themselves: a clause that makes any voluntary departure a bad leaver event, however long the founder has served, is harsh and is negotiable. Second, the interaction with employment law. A founder who is also employed by the company has employment protection under Dutch law, and the grounds on which employment ends will drive the leaver classification. Aligning the definitions in the shareholders’ agreement with the employment documentation avoids the situation where a founder wins a dismissal case and still loses their shares.Acceleration on a sale
Acceleration decides what happens to unvested shares if the company is sold before the schedule has run. Single trigger acceleration vests everything on the sale itself. Double trigger acceleration requires two events, normally the sale and, within a defined period afterwards, the founder’s departure at the acquirer’s initiative or for good reason. Double trigger is the common and the more defensible position: it protects the founder against an acquirer who removes them to avoid honouring the equity, without handing everyone their full stake the moment a buyer appears.Reserved matters: the decisions you can no longer take alone
Protective provisions, usually called reserved matters or approval rights in Dutch documentation, are the list of decisions the company or its management board may not take without the consent of the investor or of a defined majority of the preference shareholders. They are the control counterpart to the economic terms, and they are permanent in a way the valuation is not.
Negotiating the list down
The aim is not to remove the list, which will not happen, but to separate decisions that change the shape of the company from decisions that are simply management. Three techniques do most of the work. Put thresholds on financial items, so that only borrowing, capital expenditure or disposals above a stated figure need consent, and index or review those thresholds as the company grows. Define the approving body as a majority of the preference shareholders rather than a single named investor, so that no one holder can block the company alone. And build in a deemed-consent mechanism: if the investor does not respond within a set number of business days to a properly made request, consent is treated as given. Without that, a slow investor becomes an accidental veto.Board composition and governance in a Dutch bv
A Dutch bv has a management board (bestuur), and it has a supervisory board (raad van commissarissen) only if the articles of association create one. It is also possible to have a one-tier board, in which executive and non-executive directors sit together and tasks are divided between them. This matters because investor board seats imported from an American term sheet do not map onto a Dutch structure without a decision about which structure you are actually building.In practice a Series A investor in a Dutch startup takes one of three positions. They appoint a supervisory director, which requires the articles to provide for a supervisory board and gives the investor a role in supervision rather than in management. They appoint a non-executive director in a one-tier board. Or they take an observer seat with the right to attend and receive papers but not to vote, combined with a strong reserved matters list. The third is common at seed stage and is often the better trade for founders, because control is exercised through defined approval rights rather than through a permanent presence in the decision-making body.Directors owe their duty to the company, not to the shareholder who appointed them
This is the point most often misunderstood. Under Dutch law a director must be guided by the interest of the company and of the enterprise connected with it. A director nominated by an investor does not represent that investor in the boardroom, and a director who has a personal interest conflicting with the interest of the company may not take part in the deliberation and decision-making on that matter. If that rule leaves the board unable to decide, the decision passes to the supervisory board or, failing that, to the general meeting.The practical consequence is that a board seat is a weaker instrument of investor control than it looks, and that the reserved matters list, exercised at shareholder level, is where the real control sits. It also means founders who are directors cannot use the board to advance their own position as shareholders. Understanding that division early prevents a great deal of later conflict; where it goes wrong anyway, the routes available are set out in our article on shareholder disputes in the Netherlands.Voting rights, profit rights and depositary receipts
Dutch law gives a bv unusually flexible share structures, and a term sheet drafted abroad often ignores them. The articles may create shares without voting rights, which still carry a right to share in the profits, and shares without profit rights, which still carry a vote; a share cannot be stripped of both at once. That flexibility is useful for employee participation and for family or founder holdings that should share in value without complicating governance.The alternative route is the depositary receipt. Shares are transferred to a foundation (stichting administratiekantoor, or STAK), which issues depositary receipts to the beneficiaries. The foundation holds the voting rights and the receipt holders hold the economic entitlement. Many Dutch startups use a STAK to hold employee participations, so that a growing group of small holders does not turn every shareholder resolution into an administrative exercise. Whether receipt holders have meeting rights depends on what the articles say, and that is a point to settle when the structure is set up rather than later.
Exit mechanics: drag-along, tag-along and transfer restrictions
The clauses that govern how shares change hands decide whether an exit is possible at all. A drag-along right allows a defined majority of shareholders who have agreed to sell to require the remainder to sell on the same terms, which is what makes a clean hundred per cent sale achievable. The threshold, and whether the preference shareholders can trigger it alone, are the negotiation. A tag-along right is the mirror image: if a majority sells, the minority may join the sale on the same terms rather than being left with a new controlling shareholder they did not choose.Layered over these is the statutory position. The articles of a bv may restrict the transfer of shares, typically through a right of first refusal for the other shareholders or a requirement of approval by a company body. Article 2:195 of the Dutch Civil Code permits such restrictions but does not allow them to make a transfer impossible or excessively difficult, so a shareholder who genuinely wants to sell cannot be locked in indefinitely. Where the articles, the shareholders’ agreement and the term sheet each contain transfer machinery, they must be reconciled deliberately; conflicting transfer clauses are one of the most common causes of a stalled exit.Two related terms belong here. A redemption right, under which an investor can require the company to buy back its shares after a period if no exit has occurred, is far less common in Europe than in the United States and is constrained in a bv by the rules on distributions, since a buy-back is a payment to a shareholder and is subject to the same solvency considerations. And pay-to-play, under which an investor who does not participate in a later round loses part of its preference, is a founder-friendly term that is worth asking for when a round is competitive.Warranties, conditions and the road to completion
A term sheet also sketches what still has to happen before the money arrives, and founders consistently underestimate this part. The investor will want warranties from the company and, in most European venture deals, a limited set from the founders personally, covering title to the shares, ownership of the intellectual property, the accuracy of the accounts, the absence of undisclosed liabilities, compliance with employment and data protection obligations, and the validity of key contracts. The term sheet should say who gives warranties, whether founder liability is capped and at what level, and for how long claims can be brought.Disclosure is the counterweight. Anything properly disclosed in the disclosure letter or the data room qualifies the warranties and cannot then be claimed on, which makes the disclosure exercise the most valuable defensive work a founder does in the whole process. Start it early, and disclose specifically rather than by dumping documents into a folder.Conditions to completion normally include satisfactory due diligence, approval by the investor’s investment committee, execution of the amended articles of association and the shareholders’ agreement, delivery of founder service agreements and intellectual property assignments, and sometimes the appointment of a supervisory or non-executive director. In a bv the closing itself takes place before a civil-law notary, who executes the deed of issue and, where relevant, the deed of amendment of the articles. Building that notarial step into the timetable, together with the bank formalities and the register of shareholders, prevents an avoidable delay at the end of a process everyone wants finished.What to check before you sign
Model the exit before you argue about the valuation. Build a waterfall that shows what each shareholder receives at a low, a middling and a high sale price, and run it again with the preference structure the investor has proposed and with the one you want. A single spreadsheet will tell you more about the deal than a week of discussion about the pre-money number, and it converts an abstract clause into a figure you can point at.Read the term sheet against the documents it will become. The term sheet is short; the articles of association, the deed of issue and the shareholders’ agreement are long, and everything not settled in the term sheet will be settled in them, under time pressure, after exclusivity has already removed your alternatives. Anything you care about belongs on the two pages, not in the drafting.Check the option pool. If the term sheet says the pre-money valuation includes an enlarged employee option pool, the dilution from that pool falls on the existing shareholders alone, which is an effective reduction in the price you are being paid. Ask what the pool is for, over what period it will be granted, and whether it can be sized on a post-money basis instead.Take proper advice on the tax treatment of founder shares and employee participations before the structure is fixed rather than after. We do not give tax advice; the point is that the legal structure and the fiscal treatment interact, and a tax specialist should look at the participation plan while it can still be changed.Finally, weigh the investor, not only the terms. A slightly lower valuation from an investor who behaves well in a difficult round is worth more than an aggressive headline number attached to a full ratchet and a long list of vetoes. Our legal checklist for a startup funding round sets out the documents and decisions that follow the term sheet, and it is worth reading before you sign rather than afterwards. If you are still deciding how to protect the technology behind the business, see our article on how startups and investors protect intellectual property in the Netherlands, and on approach and tactics our note on contract negotiation strategies.Law and More advises founders and investors on venture financing in the Netherlands: reviewing and negotiating term sheets, drafting shareholders’ agreements and articles of association, and structuring founder and employee participations. We act for the company and for the founding team, and we say plainly which terms are market and which are not. You can read more on our corporate law practice page and in our overview of legal advice for startups. Contact us to discuss a term sheet you have received.Frequently asked questions about term sheets
The questions below are the ones founders raise most often once the main clauses are clear.What is the difference between a binding and Non-binding term sheet?
You can think of a startup term sheet as almost entirely non-binding. It’s essentially a detailed handshake agreement or a letter of intent; it lays out the proposed terms for an investment but isn’t the final, legally enforceable contract. Its real purpose is to make sure everyone is on the same page about the big-picture items before diving into the costly and time-consuming process of due diligence and drafting definitive legal documents.
That said, a couple of key clauses are usually made explicitly binding. These typically include:
- No-Shop Clause: This is a big one. It prevents you from talking to or soliciting offers from other VCs for a set period, giving the investor who issued the term sheet exclusivity.
- Confidentiality: A standard clause requiring both you and the investor to keep the details of your negotiations under wraps.
How do I model the impact of liquidation preferences on my exit?
The best way to really understand the financial implications is to build a simple spreadsheet—often called a “cap table waterfall analysis”. It sounds more complicated than it is.
First, you’ll list all your shareholders—founders, investors, employees—and how many shares each holds. Next, create a few columns for different hypothetical exit scenarios, say, €5 million, €15 million, and €50 million. For each scenario, the first step is to pay out the investors according to their liquidation preference (for example, 1x their original investment). Whatever is left over is then distributed among all shareholders based on their ownership percentage. This exercise makes it crystal clear who gets what in various outcomes.
Should I worry about participating Preferred shares?
Yes, absolutely. You need to be very cautious here. Participating preferred shares are heavily investor-friendly and can dramatically reduce the payout for founders and employees at exit. This structure allows an investor to “double-dip”—they get their initial investment back first, and then they also get their ownership percentage of whatever money is left.
While they were more common in the past, fully participating preferred shares are now much less standard in competitive funding rounds, especially in markets like the Netherlands. If you see this term, it should be treated as a major red flag.
If an investor is pushing hard for this, it’s critical to model its dilutive effect. You should negotiate strongly for standard non-participating preferred shares instead. If they won’t budge, a compromise could be to cap the participation at a certain multiple of their investment.
