The term sheet from the investor's side: what to ask for, and what breaks SEIS
The protections a minority investor actually needs, the ones that are market at seed, the ones that destroy tax relief, and how to read a lead investor's terms before you ride on them.
At seed, most angels invest on terms the lead negotiated. That is sensible — but you should know what the terms give you, what they do not, and which investor protections would cost you your SEIS or EIS relief if anyone tried to add them. Here is the minority investor's reading of a seed term sheet.
What a small investor actually needs
- Information rights. Monthly or quarterly management accounts, annual accounts, the budget. Without these you are investing blind for five years.
- Pre-emption. The right to take part in future rounds pro rata, so you can follow your winners and are not diluted out without a chance to respond.
- Tag-along. If the founders or a majority sell, you can sell on the same terms.
- Consent on the big things. An investor-majority consent list covering share issues, sale of the business, borrowing over a threshold, changes to the articles. You will rarely be the majority; the point is that someone independent of the founders is.
- Founder vesting and leaver terms. Your money is backing the people; the terms should mean they lose equity if they leave early.
- Warranties with a disclosure letter. The company confirms the facts; anything wrong that was not disclosed is claimable.
What is market at seed
All of the above, plus drag-along at 75% by value (so a minority cannot block a sale), restrictive covenants on founders, a board seat or observer for the lead, and a cap on warranty claims at the amount invested. Costs: each side bears its own, or the company pays the lead's legal fees up to a cap.
What breaks SEIS/EIS
The schemes require full-risk ordinary shares. Anything that reduces your risk below that of an ordinary shareholder can disqualify your relief — and sometimes everyone's:
- Preference shares or liquidation preferences. You get your money back first — and lose the relief.
- Redemption rights or put options. A right to have the company buy you out. Disqualifying.
- Guaranteed returns, dividends or buy-backs. Disqualifying, and a financial promotion problem besides.
- Anti-dilution ratchets that issue you free shares if a later round is lower. Usually disqualifying; weighted-average protections in the articles may be acceptable — ask the adviser.
- Loans alongside the shares or arrangements that mean you are not at risk for the full amount.
- Being connected: over 30% of the company, or an employee. Unpaid directors are fine; paid directors have conditions.
If a term sheet offers you one of these as a sweetener, it is costing you more in relief than it gives in protection. Decline it.
Reading a lead's terms
Ask for the term sheet before you commit. Check: are you on the same share class and price as the lead? (You should be.) Does the consent list protect minorities or just the lead? Are information rights for all investors or only the lead? Is there anything — a side letter, a fee, an option — that gives the lead economics you are not getting? Leads are entitled to a board seat for doing the work; they are not entitled to a different price.
Questions investors ask
"The founders want me to sign a deed of adherence to an existing shareholders' agreement."
Normal for a top-up or second close. Read the agreement you are adhering to; it is the one you will live under.
"Can I ask for a board observer seat for £25,000?"
You can ask. At seed, observer seats go to the lead or to investors with specific expertise. A better ask is a quarterly call.
"There is no shareholders' agreement at all."
For a first round that is a gap. Insist on one — a seed-round template from a solicitor who does these is inexpensive and protects every investor, including you.