When you put money into a new company, you’re given a document called a term sheet. It’s usually long, packed with legal language, and can be tough to make sense of. A term sheet is a plan for your investment. It explains the key rules of the deal. Understanding these rules helps you avoid problems later.
This guide explains the most important parts of a term sheet. It is for Swiss investors who put between CHF 5’000 and CHF 100’000 into growth-stage startups.
What a Term Sheet Is
A term sheet is a summary of the main points of an investment. It is not the final legal contract. Think of it as an agreement on the big ideas before lawyers write the full documents.
Most of the term sheet is not legally binding. This fact means you or the founder can still walk away. However, some parts, like rules on keeping information secret, are binding right away.
In Switzerland, many term sheets use templates from an organization called SECA [1]. These templates are a common starting point. But every investment is different, so the details can be changed.
For investments with many small investors, like in crowdinvesting, the term sheets are often simpler. These investors usually get shares with fewer control rights. This structure helps founders run the company without asking hundreds of people for permission on every choice.
Money Rules: Who Gets Paid
Money rules, or economic terms, decide how you get your investment back and make a profit. They protect your money.
Company Value: Pre-Money and Post-Money
The company’s value, or valuation, decides the price you pay for each share. It is important to know if the value is “pre-money” or “post-money.”
- Pre-money value is the company’s worth before your investment.
- Post-money value is the company’s worth after you invest.
For example, a company has a pre-money value of CHF 4’000’000. You invest CHF 1’000’000. The post-money value is now CHF 5’000’000. You own 20% of the company (CHF 1’000’000 is 20% of CHF 5’000’000).
If a founder just says the value is CHF 5’000’000, it can be confusing. If you think that is the pre-money value, your investment of CHF 1’000’000 would make the post-money value CHF 6’000’000. In that case, you would only own 16.7% [2]. It is important for Swiss founders and investors to be very clear about this point [3].
Anti-Dilution: Protection from Lower Value
Anti-dilution rules protect you if the company raises more money at a lower value. A funding round at a lower value is called a “down round.”
The standard in Switzerland is called broad-based weighted average anti-dilution [7]. This formula adjusts the price of your shares in a way that is fair to both investors and founders.
A rule called “full-ratchet” is a big warning sign. It is very bad for founders and can make it very hard for the company to raise money in the future [8].
Dividends: Not a Source of Income
Most new companies do not pay dividends, which are payments to shareholders from company profits. Startups use their profits to grow the business. Term sheets often have rules about dividends, but you should not expect to receive them from a startup [9].
Control Rules: Who Makes Decisions
Control rules explain who has the power to make decisions in the company.
The Board of Directors
For larger investments, like CHF 500’000 to CHF 5’000’000, the main investor often gets a seat on the board of directors [10]. The board helps guide the company. Smaller investors usually do not get a board seat.
A new Swiss company might have a board with three people: two chosen by the founders and one chosen by the investors [11].
Being a board member in Switzerland is a serious job with legal risks. Board members can be held responsible if the company has problems [12]. This risk is why they need good information from the company.
Protective Provisions: Investor Veto Rights
Protective provisions give investors the power to block, or veto, major company decisions. These rules protect your investment even if you are a minority owner.
Common veto rights in Swiss deals require investor approval to [13]:
- Sell the company.
- Change the rights of your shares.
- Create new shares that are better than yours.
- Raise more money.
- Pay dividends.
- Change the number of board members.
These rules do not let you run the company day-to-day. They give you a say in big changes that could affect your money.
Information Rights
Information rights are rules about what financial reports you get. Swiss law gives basic rights, but you should ask for more in your agreement [14].
Big investors usually get [15]:
- Yearly financial reports that have been checked by an accountant.
- Financial reports every three months.
- The company’s plan for spending for the year.
Crowdinvesting investors usually get updates every three or six months through the platform.
Exit Rules: How You Sell Your Shares
Exit rules explain how you can sell your shares. Shares in a startup are hard to sell for many years.
Drag-Along Rights : Drag-along rights let the majority of shareholders force the minority shareholders to sell their shares. This rule helps make sure a sale of the company can happen. For example, if a buyer wants to purchase the company and owners with 80% of the shares agree, you also have to sell your shares at the same price [16]. This rule is standard in Switzerland [17].
Tag-Along Rights: Tag-along rights protect small investors. If the founders sell their shares, you have the right to sell your shares at the same time and for the same price [18]. This rule stops founders from leaving other investors behind.
Right of First Refusal (ROFR): A ROFR means that if you want to sell your shares, you must offer them to the company or other shareholders first [19]. This rule makes it difficult to sell your shares to a new person before the whole company is sold.
Rules for Founders
These rules apply to the company’s founders, but they are important for investors to know.
Founder Vesting: Vesting is a rule that requires founders to earn their shares over time. A common rule is that shares are earned over four years, with nothing earned in the first year [20]. This setup is called a one-year cliff.
If a founder leaves in the first year, the company can buy back all of their shares for a very low price. After one year, they get 25% of their shares. The rest are earned monthly for the next three years. This rule protects the company if a founder leaves early.
Founder Lockups : Founders are usually not allowed to sell their shares for a long time. These rules ensure that founders stay with the company and are committed to its success.
IP for University Startups : For companies started at universities like ETH Zurich or EPFL, the ideas and technology, known as intellectual property (IP), often belong to the university [21]. The startup must have a clear agreement to use this IP. Investors should check this agreement carefully.
The Swiss Legal System
In Switzerland, two main documents create the investment rules.
The Articles of Association is a public document. It shows the company’s basic structure.
The Shareholders’ Agreement is a private contract between the owners. It contains most of the investor protection rules, like drag-along and tag-along rights [22, 23]. Swiss law allows for flexibility in this agreement, but some rules cannot be broken [24].
Warning Signs for Investors
Some rules in a term sheet can be a warning sign, or red flag.
Be careful of deals that are too friendly to founders:
- No liquidation preference.
- No founder vesting.
- Very few investor veto rights.
Also be careful of deals that are too friendly to investors:
- Full-ratchet anti-dilution [25].
- Participating liquidation preference.
- What Crowdinvesting Investors Get
If you invest a smaller amount, like CHF 10’000, through a crowdinvesting platform, your rights are usually more limited [26].
Money rights: You get shares and a part of the profit if the company is sold.
Control rights: You usually have no board seat or veto rights.
Information rights: You get regular updates from the platform.
Negotiation is Possible
Term sheets are not final. Many of the key rules can be negotiated. However, the power to negotiate depends on the situation.
In Switzerland, negotiations are usually calm and based on facts [27]. For crowdinvesting, you cannot negotiate the terms yourself. You must decide if you accept the deal as it is offered.
Why This Information Is Important
Understanding a term sheet helps you avoid common mistakes. The rules in the term sheet decide if you will make money, even if the company does well. It is the foundation for your relationship with the company for many years. Before you sign, take the time to understand it.
Checklist Before You Invest
- Read every page of the term sheet.
- Ask the founder or platform to explain anything you do not understand.
- Get Help: For a large investment (over CHF 50’000), ask a lawyer to review the document.
- Compare: See how the terms compare to Swiss standards, like the SECA templates.
- Managing risk is key to successful investing. For Swiss investors, balancing high-risk startup bets in sectors like healthcare with more stable alternative investments is a smart strategy. A multi-asset approach, such as the one offered by CapiWell, can help you build a stronger, more diversified portfolio.
References
[1] SECA Model Documentation, SECA (Swiss Private Equity & Corporate Finance Association)
[2] Pre-Money & Post-Money Valuation in Funding Rounds, LEXR
[3] An overview of Term Sheets, Swiss Startup Association
[4] An overview of Term Sheets, Swiss Startup Association
[5] Introduction to liquidation preference, LEXR
[6] Term Sheet Red Flags, Contrary
[7] SECA Shareholders Agreement “light” – First Edition – June 2018, SECA
[8] Anti-Dilution Protection in Funding Rounds, LEXR
[9] Q&A: process for venture capital investments in Switzerland, Lexology
[10] An overview of Term Sheets, Swiss Startup Association
[11] An overview of Term Sheets, Swiss Startup Association
[12] Obligations of the board of directors, Swiss Federal Administration
[13] SECA Shareholders Agreement “light” – First Edition – June 2018, SECA
[14] Shareholders’ Rights & Shareholder Activism 2023 – Switzerland, Chambers and Partners
[15] What U.S. Venture Capitalists Should Know About Backing Startups with Swiss Entities, SIGTAX
[16] Intro to Shareholders’ Agreements, Swiss Startup Association
[17] The shareholders’ agreement in the Start-up (Nr. 3), VISCHER
[18] Intro to Shareholders’ Agreements, Swiss Startup Association
[19] Intro to Shareholders’ Agreements, Swiss Startup Association
[20] Understanding Vesting Agreements and Leaver Clauses, Lex Futura
[21] Spin-offs, Swiss Startup Association
[22] Shareholders Agreement: What Founders need to Know, Nexova
[23] Everything about the shareholders’ agreement (SHA), Stach Rechtsanwälte AG
[24] Practical Guide to Shareholder Agreements: Limits Under Swiss Law, Legal Sources (research document attribution)
[25] Templates and tips for first-time founders and investors, Startupticker
[26] Crowd-investing: Equity-based financing, Swiss Federal Office for Economic Affairs (SECO/KMU Portal)
[27] Cultural Considerations in Switzerland, Rivermate
