Demistifying Term Sheets: Part 8 - Pre-Emptive Rights

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 the following lines we will discuss a must in our term sheets: Pre-Emptive Rights.

Pre-Emptive Rights

Pre-emptive rights (also known as pro-rata rights) provide existing shareholders the first opportunity to purchase new shares before the company offers them to external investors. These rights ensure that shareholders can maintain their proportional ownership and prevent dilution during subsequent funding rounds.

How Pre-Emptive Rights Work

• Right to purchase new shares: Shareholders with pre-emptive rights have the first refusal on newly issued shares, allowing them to maintain their ownership percentage.
• Triggering events: Pre-emptive rights are typically triggered during new equity offerings, such as follow-up rounds, and may extend to convertible securities.
• Proportional allocation: When new shares are issued, shareholders can purchase their pro-rata share based on their current ownership, preserving their stake in the company.

Why Pre-Emptive Rights Matter

These rights protect investors from dilution and help maintain their influence in future funding rounds. However, they also ensure that founders can continue raising capital without unnecessary friction, balancing the need for additional funding with the preservation of ownership.

Key Takeaways

Cardumen Insight

‍Find a balance between safeguarding shareholder equity and maintaining the company’s ability to raise capital efficiently.

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