Beyond market standard: how biotech term sheets diverge from the rest of venture

The equity story is the thesis you sell. The ask is the value the round buys. The term sheet is how that value is divided when the exit arrives, and it is the one most founders read last and least.

A term sheet is the short document that sets the terms of an investment before the long contracts are drafted. Most founders read it for one number, the valuation, and treat the rest as standard wording to be accepted. By reputation that wording is founder-friendly, and most of it is. The problem is that "standard" was defined by software venture capital, and a biotech is not a software company. Two differences change what the same words do.

Two facts that break the analogy

First, time and odds. A drug takes more than a decade to reach approval, and most candidates never arrive: only about one in ten compounds that enter clinical trials is eventually approved, and in oncology it is closer to one in thirty. A biotech therefore raises money many times over many years, and each financing is another occasion for a clause to be triggered.

Second, the exit. A software company hopes to go public or be bought in a deal large enough that everyone is paid in full and the fine print stops mattering. A biotech usually exits by being acquired by a pharmaceutical company, often for a respectable but not enormous sum, and the stock-market route is rare and opens and closes with the cycle. At that more modest scale, the clauses that decide how the price is split are not fine print. They decide what you walk away with.

The two businesses, side by side:

Hold those two facts in mind. Every difference below follows from them.

The clauses are the rules of a game

Here is the lens that pulls the rest of this together. A term sheet is not a description of a deal. It is a set of rules for a game that will be played out over several years by founders, investors and, eventually, an acquirer. Each clause does one of two things: it fixes the payoff at one of the ways the game can end, or it decides who gets to move at a given point. Rational players then behave according to those rules, which means the same starting position can lead to very different endings, and very different payoffs, depending only on the rules written at the outset.

That is why two companies with an identical valuation can hand their founders entirely different outcomes. The valuation is the opening position. The clauses are the rules, and the rules, not the opening position, decide how the game ends.

One move is worth naming, because it is the founder's weakest. The investor wrote the rules and has read them. The founder, more often than not, has not. The asymmetry in a biotech financing is not only scientific. It is that one player at the table understands the payoff structure of the game, and the other is still looking at the valuation.

The liquidation preference: who gets paid first

Start with the clause that moves the most money and gets the least attention. When a company is sold, the proceeds are not simply split by who owns what. They are paid out in an order. Investors hold what are called preferred shares, which stand at the front of the queue. Founders and staff hold common shares, which stand at the back. The liquidation preference is the rule that sets how much the front of the queue collects before the back gets anything.

The standard version is mild. A "1x non-participating" preference, used in almost all venture deals, means an investor takes back the larger of either the money they put in or their ownership share, and then steps aside. In a large exit it is barely noticeable, because there is plenty left for everyone behind them.

Put the same mild clause on a biotech and watch what happens. Imagine your spinout raises a seed round, a Series A and a Series B, EUR 40m in total, all on that standard 1x rule. A pharma company then buys the company for EUR 50m, a result most scientists would be proud of. The investors are first in the queue, so they take their EUR 40m back. That leaves EUR 10m for everyone else, to be shared among founders and staff whose ownership has been diluted by every round along the way. The headline was EUR 50m. Your share of it is thin. No clause was unusual here. A long queue and a moderate sale did the work.

The harsher variants make it worse. A "participating" preference lets the investor take their money back and then also share in what is left, as if they were standing at the back of the queue too. In effect they are paid twice. A "multiple," such as 2x, returns double the investment before anyone else is paid at all. Both are rare in the market averages, but they tend to appear in the difficult, lower-priced rounds that biotech runs into more than most industries. The point is not that biotech terms are predatory. It is that a clause everyone calls standard can still leave the founder with very little, and you only see it coming if you read the document for the sale, not for the round.

The clause also bends behaviour, which is the part game theory makes visible. When a preference stack sits above a modest exit, the founders' shares pay off only if the company sells for well above that stack, so the founders' stake behaves like a bet that returns nothing unless the outcome is large. The rational response is to take more risk, and to resist a sensible sale the investors would happily accept. The same rule that quietly redistributes a modest exit also pushes the two sides to want different endings, which is a conflict written into the term sheet long before anyone feels it.

Milestone tranching: the money you were promised, in instalments

Tranching means the investor does not hand over the full amount at once. They release it in instalments, each unlocked by reaching an agreed scientific or business milestone. It is uncommon in software but routine in life sciences, where it is written into a sizeable share of rounds, because the science advances, and de-risks, in discrete steps.

The catch is who decides whether a milestone has been met. Suppose an investor commits EUR 20m: EUR 5m now, and EUR 15m once you reach a defined endpoint, say a clear positive result in a first animal study. If the result is good but not precisely what the wording specified, or if the board simply judges the milestone unmet, the second instalment can be delayed, renegotiated at a lower price, or held over you as leverage. You announced a EUR 20m round. In practice you have EUR 5m and a board that controls the rest. Once the early money is spent and the team is committed, the investor can reopen the terms at each gate, and you have far less power to walk away than you did before you started. So the wording of the milestones matters as much as the headline size of the round.

These milestones are not new, either. They are the same ones from your ask and your capital plan, now turned into contractual triggers. What you sketched loosely in the pitch becomes the gate you are held to.

Anti-dilution: protection for the investor when the next round is cheaper

If you raise your next round at a lower price per share than the last, that is a down round, and in biotech it is common, often after a trial disappoints or a timeline slips. Anti-dilution is the clause that protects earlier investors when that happens, by adjusting their shareholding so the lower price costs them less than it otherwise would.

There are two versions. The mild and now near-universal one, weighted average, makes a proportionate adjustment. The harsh one, full ratchet, automatically reprices the earlier investor's entire stake as if they had paid the new, lower price, moving ownership from founders to investors in a single step. Full-strength ratchets have all but disappeared from the market, which is the good news.

The clause is the same in every industry. What differs is how often it goes off. Because biotech runs into down rounds more readily, the protection is more likely to be triggered, and it triggers at the worst possible moment: just after bad news, when you have the least leverage to renegotiate anything.

The strategic investor: when your investor is also your buyer

This is the difference that matters most, because it touches the whole purpose of a biotech, the eventual sale to pharma. In software, the investor and the future buyer are almost never the same party. In biotech they frequently are, because the pharmaceutical companies that acquire biotechs also invest in them early, through their corporate venture arms.

When your investor might also be your buyer, the rights they ask for in a small round can quietly control your eventual sale. Three to watch, in plain terms:

• Right of first refusal, or first negotiation: the investor can match, or get first crack at, any offer to buy the company.
• Exclusivity or field-of-use limits: restrictions on who else may license or buy what you are building, or for which uses.
• Information rights: a steady flow of your data to a party that is at once your investor, a possible buyer, and a possible competitor.

Each sounds harmless on its own. Together they can hand one company control of your exit. Picture the auction you were counting on: several pharma suitors bidding against one another for your asset. Now suppose one of them holds a right of first refusal. The others can see they will simply be matched whatever they offer, so they do not bother bidding high, or bidding at all. The competition you needed quietly disappears, and the investor that put in a minority round has, in effect, bought an option on the whole company for a fraction of its price. The right did not merely give one bidder an advantage. It changed what every other bidder should rationally do, and that shift in their behaviour, not the right itself, is what collapsed the price.

This is also where the term sheet can contradict your own equity story. If the thesis you sell every investor is that pharma is the buyer, a clause that locks up the asset for one pharma player works directly against the exit you are describing. The pitch and the contract point in opposite directions, and almost no one checks the one against the other.

The option pool shuffle: a price cut in disguise

A smaller trap, and a common one in every industry. Investors often ask you to set aside or enlarge a pool of shares for future employees, and to do it before their money is counted, "pre-money." Done that way, the new shares dilute only the existing owners, meaning you, and not the incoming investor. The headline valuation looks untouched, but your real price per share has fallen. It is a discount written as a staffing provision, and it is worth catching whether you are building software or a drug.

Control: who gets to say yes to the deal

Finally, the clauses about board seats and veto rights decide who actually approves the big decisions, the sale included. Over a long biotech road with many rounds, founders can give away a little control each time and look up years later to find they no longer hold the votes to accept the pharma offer they spent a decade building toward. The money clauses decide how the proceeds are split. The control clauses decide whether the deal happens on your terms at all.

Two term sheets, same headline

Consider two founders, each handed a term sheet with the same valuation and the same clauses.

Neither founder paid for better advice on the valuation. They paid for a different way of reading the same page.

How to read a biotech term sheet

The discipline is not a checklist. It is a change of vantage point. Read the document for the exit, not the round, and for the whole timeline, not the day of signing. One question runs through all of it: on a realistic sale, after the investors at the front of the queue are paid, what actually reaches you and your team, and which clauses move that number against you when the science slips or the timeline stretches? If a clause has no bearing on that question, it is genuinely boilerplate. If it does, it belongs in the negotiation, whatever market standard says, because market standard is describing a different market.

The clauses are standard. The odds are not. A term sheet is the rule book of a game you will spend years inside, and the other side wrote it. Read it the way they did, for the endings and the payoffs rather than the opening price, and you are at least playing the same game.

A note on what this is and is not. I am not a lawyer, and none of this is legal advice. It is an invitation to read with care. Some of these clauses look like market standard and are not, and some that are standard elsewhere carry consequences specific to biotech. Work through the term sheet with your own counsel, with the peculiarities of this field in front of both of you.

Frequently asked questions

Sources: Tufts Center for the Study of Drug Development, DiMasi et al., cost of drug development, 2016 (Journal of Health Economics). BIO, Biomedtracker and Amplion, Clinical Development Success Rates 2006 to 2015 (Thomas et al., 2016). Wong, Siah and Lo, Estimation of clinical trial success rates and related parameters, Biostatistics, 2019. Cooley Venture Financing Report, quarterly 2024 to 2025. SVB, Healthcare Investments and Exits and corporate-investor analysis, 2022 to 2024. IQVIA, Biopharma M&A outlook, 2024 to 2025. LifeSciVC on PwC/NVCA MoneyTree data, corporate venture participation.