Demistifying Term Sheets: Part 9 - Right of First Refusal and Co-Sale 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.

Right of First Refusal & Co-Sale Right

These rights are designed to regulate the transfer of shares, ensuring that existing shareholders, especially investors, have some control over changes in the ownership structure. They often come as a package and are critical for maintaining equity alignment within a company.

Right of First Refusal (ROFR):

• ROFR gives investors the first opportunity to buy shares if a founder or other shareholder intends to sell their stake.
• This protects investors from unexpected ownership changes and allows them to maintain or increase their equity stake in the company.

Co-Sale Right:

• Also known as “tag-along rights,” this allows investors to participate proportionally in a share sale initiated by a founder (and sometimes by an early shareholder as well).

Key Takeaways

Cardumen Insight

At Cardumen Capital, we invest in teams, not just businesses, which makes the founders’ commitment critical to us. If a founder is selling their stake, it raises important questions about their confidence in the company and its growth potential. While ROFR and co-sale rights are mechanisms to protect equity and stability, they also serve as valuable signals for us as investors, helping us ensure alignment between the team and the company’s long-term success. We recommend founders and investors approach these terms pragmatically.