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Heads of terms | Start-up series part 3

Continuing our start-up series we look at the next stage in your growth journey and the path to taking on investment.

Building on our previous insights, which helped you get your venture investor ready, hopefully a successful pitch and an offer of investment will follow. This is the stage when you will likely face heads of terms for the first time.

What are heads of terms?

Heads of terms, also known as term sheets or letters of intent, are drawn up to outline the key terms and points around an investment. They can vary in format and depth but generally lay out the terms and conditions upon which an investor is willing to invest, subject to a formal agreement.

As a founder or business owner, heads of terms will help you understand the deal you are being offered. They should enable you to evaluate if you want to accept or decline the investment. They can also help flush out issues right at the start before an investment relationship is formally established, leading to more harmonious investor relations as you move forward. 

Key contents

Each heads of terms document is likely to be tailored for the specifics of the investment but the following areas will typically be covered:


 How much money is being invested and in exchange for what (total £ investment, shares, percentage of share capital).

Conditions of the investment

the investment will likely be subject to the outcome of the investor's due diligence, references, regulatory approvals or tax consents, or providing advanced assurance if your fundraising meets the conditions for venture capital schemes such as EIS / SEIS / VCT.


The investor will likely seek warranties to ensure they have been provided with accurate information to make their investment decision.

Board composition

The maximum number of directors, the board seats expected by the investor (if any), number of board meetings required to be held per year.

Veto or consent items

Issues or actions for which the business will require investor or investor director approval following investment.Often these are key business decisions that an investor can veto.

Information rights

What information the investor will expect to receive or be able to request to help them monitor business progress and their investment.

Vesting/reverse vesting

Investors will often ask that you "reverse vest" part of your shareholding back into the business when they invest.This means that a certain percentage of your shares will be bought back by the company or converted into worthless deferred shares if you leave the business in a certain time frame.Details of how your shares will vest over time will be included in heads of terms.The purpose of vesting is to incentivise you to remain with the company and protect both the business and the investor should you leave (it also creates a pot of shares which can be offered to a replacement manager).

Leaver drag/tag provisions/anti-dilution ratchets

These various provisions cover what happens when there are changes to the company's shareholder base. They include what will happen when an employee or founder leaves and how their shares will be treated. "Drag along" provisions allow a majority of shareholders to accept an offer to sell their shares and then drag the minority into the sale to the same buyer on the same terms. "Tag along" allows a minority of shareholders to require an offer to be made for their shares where a majority accepts an offer which changes control of the company. The investor may also wish to protect themselves from being diluted by future fundraising.


An area highly likely to be legally binding. Confidentiality obligations will be imposed on both sides to protect you. In particular they can prevent the investor from using any confidential information to their benefit should an investment not go ahead.


Often the legal fees for an investor will be detailed in the heads of terms and is often legally binding on the parties.

Know what you're signing

While taking steps to bring on board an investor can be exciting and transform your business, it can be a complicated area. Although much of the heads of terms may be intended to be followed by a legally binding investment agreement, their contents may still have important legal and tax consequences and limit negotiation at the next stage. Warranties may also place you, as founder or director, personally liable. It's therefore important to seek professional advice and fully understand the implications of signing.

How we can help

Our Corporate team advises ambitious businesses looking to grow and raise investment.  Please do get in touch if you would like to chat through any of the above.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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