Demisifying Term Sheets: Part 4 - Dividends in VC

Negotiating a term sheet can feel like walking a tightrope, a delicate balance between ambition and protection for both entrepreneurs and investors. Every line of a term sheet carries weight, telling a story about the future of a business. Drawing from years of experience in the VC play, we are pulling back the curtain to highlight what really matters in a term sheet, how both sides should approach it, and the lessons we have learned (sometimes the hard way) to avoid common pitfalls.

In the spirit of transparency, we are sharing a copy of our full term sheet template here.

This article is meant to serve as a guide to navigating term sheet negotiations, highlighting the most critical clauses, and sharing tips for both entrepreneurs and investors. Our term sheet reflects how we do things differently. When our founders Gonzalo Martínez de Azagra and Igor de la Sota set up the fund, they did not just replicate existing VC practices, they built something that truly represents Cardumen Capital’s values.

That said, this guide is not set in stone; it is a living document that evolves as the market changes. But before diving into the details, here is an important starting point: a term sheet is not a promise to invest, in other words, it is not a legally binding document. Even when signed, it is not a guarantee of funding. Instead, it should be seen more as an agreement to keep negotiations private and, in some cases, to pause the company from exploring other offers for a certain period of time.

Now, let us get down to business. While every term sheet is unique, just like every investment offer, there are certain key terms that almost always come up in negotiations. Keep reading to learn what these are and why they matter.

In our previous articles of this series, we covered topics ranging from valuation (Part 1) to liquidation preference. In this artcicle, we turn our focus to dividends — one of the most overlooked terms in venture deals.

Dividends

Dividends are uncommon in VC, especially at early stages. Investors typically expect companies to reinvest all profits into growth rather than paying dividends to shareholders. While dividends can be a “nice-to-have”, they rarely make a significant difference in the overall success of the investment. It is also standard to see restrictions on dividend payments, to ensure resources are reinvested in growth.

Types of Dividends

Dividends in VC deals can be cumulative or non-cumulative.

1. Non-cumulative: Most term sheets specify non-cumulative dividends, which ensure preferred shareholders receive dividends alongside common stockholders, preventing payouts to common holders without investor returns.
2. Cumulative: In contrast, an approach to protect the company’s cash flow is to grant investors a class of preferred shares with cumulative dividends, typically set as a fixed percentage of the purchase price per preferred share. These cumulative dividends accrue over time and are often deferred until a liquidity event, such as an exit. No dividends may be paid to common shareholders until the preferred dividends are fully satisfied

Key Takeaways

‍Cardumen Insight

‍Dividend discussions are typically not a central focus in VC term sheet negotiations. At Cardumen, the standard approach ensures that any declared dividends are distributed equally between preferred and common stock on a pari passu basis.