M&A Investment Lessons Part 3: The Deal Is Decided Before You Think — From Term Sheet to SHA

Most founders think the real negotiation starts when the lawyers get involved. It does not. It starts with the term sheet, and by the time the lawyers are drafting the Shareholders’ Agreement, most of the important decisions have already been made.

The term sheet is where the investor first puts their key provisions on paper. Valuation, yes, but also liquidation preferences, anti-dilution mechanics, board composition, reserved matters, vesting, and drag-along rights. The terms that will govern your company for years.

And most founders sign it without legal advice.

Why founders skip the term sheet

I understand the instinct. The term sheet is usually described as “non-binding.” The investor presents it as a formality; a summary of what has been discussed, a starting point. The founder does not want to seem difficult, does not want to slow things down, and does not want to spend money on lawyers before the deal is certain.

So they sign. They focus on the valuation number, glance at the rest, and assume everything else can be negotiated later in the “real” documents.

That assumption is almost always wrong.

What actually happens

Once a term sheet is signed, it becomes the baseline for every document that follows. The SHA, the subscription agreement, the articles of association — they are all built on the framework the term sheet established.

Try pushing back on a liquidation preference at SHA stage that you already accepted in the term sheet. The investor’s lawyer will say: “This was agreed.” And they are right. You may not have understood what you were agreeing to, but you agreed.

This is not bad faith on the investor’s part. It is how deals work. The term sheet is the negotiation. The SHA is the documentation of what was negotiated. If you did not negotiate at the right stage, you missed your window.

What to watch for in the term sheet

The valuation gets all the attention. But these are the provisions that actually determine your life after the investment:

Liquidation preferences (US concept). A 1x non-participating preference is standard and fair; the investor gets their money back before you, or takes their pro-rata share, but not both. A 2x participating preference means they get their money back twice and then take their share of what remains. The difference can be worth millions on exit, and it is often buried in a single line of the term sheet.

Anti-dilution. If the next round is at a lower valuation, how is the investor protected? Full ratchet anti-dilution can devastate founder ownership in a down round. Weighted average is more balanced. Many founders do not know which one they agreed to until it matters.

Board composition. Who controls the board? If the investor has the right to appoint a majority of directors, or if quorum requires their appointed director to be present, day-to-day governance depends on the investor’s engagement and goodwill.

Reserved matters. What can you not do without investor consent? Hiring above a certain salary, taking on debt, changing the business plan, issuing new shares, entering new markets, paying dividends. Each one might seem reasonable individually. Together, they can mean every material decision requires a phone call to your investor.

Drag-along rights. Can the investor force you to sell? If the threshold is low or the minimum price is not specified, you could be compelled to sell at a price you would never have accepted voluntarily.

Vesting and leaver provisions. Are your own shares subject to vesting? What happens if you leave, voluntarily or involuntarily? The difference between good leaver and bad leaver treatment can be the difference between keeping your equity and losing most of it.

From term sheet to SHA

If you negotiate the term sheet properly, the SHA becomes a documentation exercise, important, detailed, but not a battlefield. The key commercial points are settled. The lawyers translate them into binding language, add the mechanics, and fill in the operational detail.

If you did not negotiate the term sheet properly, the SHA stage becomes painful. You are trying to reopen points the investor considers agreed. Trust erodes. The process slows down. And you are negotiating from a weaker position because you already said yes.

One approach that works well in the SHA is what we call a “Superior Majority” concept, setting voting thresholds that require both founders and investors to agree on truly major decisions (fundraising, exit, fundamental changes to the business), while leaving day-to-day operations, hiring, and commercial decisions to the founders and the management team they appoint. But this needs to be established at term sheet stage. If the term sheet already gives the investor unilateral control over reserved matters, introducing Superior Majority in the SHA is an uphill battle.

The SHA should also clearly define what happens when the parties disagree. A well-drafted deadlock mechanism, negotiation, then mediation, then a structured buy/sell process, is far better than silence, which usually leads to paralysis or litigation.

Get your lawyer involved early

This is the single most important piece of advice in this series: involve your lawyer at term sheet stage, not after.

A good lawyer will not slow the process down. They will review the term sheet, explain what each provision actually means in practice, flag the points that matter, and help you negotiate before anything is locked in. An hour of legal advice at term sheet stage is worth more than twenty hours of SHA negotiation trying to undo what was already agreed.

I have seen founders save themselves from punitive liquidation preferences, disproportionate reserved matters lists, and aggressive drag-along provisions, all at term sheet stage, with a single round of comments. I have also seen founders come to me after signing the term sheet, asking me to “fix” the SHA. By then, the room to negotiate is narrow.

The takeaway

The term sheet is not a formality. It is the negotiation. The SHA is where you document what was negotiated — and if you did not negotiate properly at the right stage, the SHA is already decided.

Do not sign a term sheet without understanding every provision in it. Do not assume anything is “standard” without checking. And do not wait until the lawyers are drafting the SHA to start thinking about control, governance, and exit.

The founders who protect themselves are the ones who took the term sheet seriously, and got advice before they signed, not after.

Thor-Amadeus Morillas — Founder, Amadeus Consulting

Read Part 1: Smart Money That Turns Out to Be Stupid Money

Read Part 2: Prepare Like You Are Already Under Due Diligence