Legal Questions to Ask Before Signing a Term Sheet in Singapore

Founders often treat a term sheet as a formality, a handshake in document form that signals investor enthusiasm and gets the real paperwork rolling. That instinct can be costly. While term sheets are generally non-binding on the core commercial terms, they set the template for every agreement that follows. The economic split, governance structure, and exit mechanics you agree to in principle today will be hard-wired into your shareholders' agreement, constitution, and share subscription agreement later.

Here are the essential legal questions every founder should be asking, ideally with a corporate lawyer by their side, before committing to a term sheet.

1. What Exactly Is and Isn't Binding?

Most Singapore term sheets include two categories. Non-binding commercial terms (valuation, equity percentage, investment amount) and binding procedural clauses (exclusivity, confidentiality, and sometimes governing law). The binding clauses may seem minor, but an exclusivity clause also called a "no-shop" clause, that locks you out of speaking to other investors for 60 or 90 days can be commercially damaging if the deal eventually falls apart.

Ask: How long is the exclusivity period? Is there a carve-out if the investor fails to meet milestones on their end? What are the consequences of a breach of the confidentiality clause? These small provisions carry real legal teeth.

1. What Share Class Is the Investor Receiving and What Rights Come With It?

In Singapore, investors typically receive preference shares rather than ordinary shares. This is standard, but the specific rights attached to those preference shares vary enormously and deserve line-by-line scrutiny.

Key rights to examine include:

• Liquidation Preference: Will the investor receive their money back first in a liquidation or exit event? Is it a 1x non-participating preference (they get their investment back, then share pro-rata in the remainder) or a participating preference (they get their money back and then also share in the remaining proceeds)? Participating liquidation preferences can dramatically reduce founder payouts in moderate exit scenarios.
• Anti-Dilution Protection: If the company raises a down round in the future, anti-dilution clauses protect the investor by adjusting their share price downward. Full ratchet anti-dilution is the most aggressive and most founder-unfavourable. Broad-based weighted average is more common and more balanced. Understand which applies here.
• Dividend Rights: Are dividends cumulative or non-cumulative? Cumulative dividends accrue even if unpaid and can create a significant liability on the balance sheet over time.

1. What Governance Rights are the Investor Asking For?

• How many board seats will investors get, and what is the overall board composition? Lead investors typically get one seat; ensure founders retain majority or tie-breaking rights. Review quorum and reserved matters lists.
• What are the “reserved matters” or investor consent thresholds? These should be percentage-based (e.g., >50% of Series A shares) and exclude routine decisions. Avoid overly broad lists that require investor approval for hiring or minor contracts.
• Do investors get observer rights or information rights beyond statutory requirements? Monthly/quarterly management accounts and annual budgets are standard but confirm frequency and confidentiality.
• Check whether investors will have voting rights consistent with their shareholding, or enhanced rights such as multiple votes per share.

1. What Do the Founder Vesting and Lock-Up Terms Say?

• Is founder vesting required, and on what terms?
• Are there drag-along, tag-along, or right of first refusal (ROFR) provisions? Drag-along should require a minimum price and pro-rata application; ensure it aligns with your exit goals.
• What restrictions apply to founders post-investment (non-compete, non-solicit)? These should be reasonable in duration (12–24 months) and geography, enforceable under Singapore law.
• Will founders be required to provide personal warranties or indemnities? Limit these to knowledge-qualified reps on IP ownership and compliance.

1. What Governs This Agreement, and Where Are Disputes Resolved?

• What law governs the Term Sheet?
• Does the term sheet specify arbitration or litigation? If arbitration, under which rules, at which seat, and before how many arbitrators? If litigation, which court has jurisdiction? Singapore's courts are efficient and well-regarded, but arbitration offers confidentiality that public court proceedings do not.

Conclusion

A term sheet sets the architecture of your relationship with your investor. The provisions it contains, even those that appear to be mere placeholders, shape the definitive agreements that follow. In Singapore’s market, where legal standards are high and enforcement is real, the questions you ask before signing are as important as the negotiations that precede the term sheet itself.

The single most important practical step is to engage a Singapore-qualified corporate lawyer before you countersign anything. The cost of that advice is a fraction of the cost of a badly structured round, a disputed exit, or a governance deadlock that could have been prevented with a few well-placed questions at the term sheet stage.