Understanding the Term Sheet: What African Founders Need to Know

Raising capital for start-ups is a challenging task anywhere in the world, but for African founders, it often comes with additional complexities due to unique regional and market factors. From varying regulatory frameworks across different countries to limited access to traditional venture capital, African entrepreneurs must navigate a distinct landscape when engaging with investors. At the centre of these engagements is the term sheet—a critical, non-binding agreement that sets the groundwork for how an investment deal will take shape.

In this expanded article, we’ll not only break down the key components of a term sheet but also provide deeper insights into negotiating these terms in the African context, supported by relevant case studies of African start-ups that have successfully navigated the term sheet process.

Key Components of a Term Sheet in the African Context

1. Valuation and Equity Dilution

African Market Challenges: Many African start-ups struggle with valuation due to the relative scarcity of comparable companies in their local markets. Valuation is often subjective, with investors sometimes undervaluing African start-ups due to perceived risks associated with regulatory instability, fragmented markets, or lack of robust data on market sizes.

Case Study: Jumo          

Jumo, a South African fintech start-up offering financial services to the underbanked, faced valuation challenges in its early stages. However, the company’s ability to demonstrate the impact of its platform on financial inclusion across multiple African countries helped secure higher valuations from investors. Jumo’s strategy to scale rapidly across different regions allowed them to raise over $100 million, positioning them as one of the most successful African fintech companies.        

Takeaway for African Founders: Valuation is not just about your current numbers. Founders must articulate the broader market opportunity, growth potential, and ability to solve unique local challenges that foreign investors may not fully understand. Demonstrating how your start-up can expand into other African markets is crucial.        

2. Liquidation Preferences

Regional Considerations: African founders may face heightened liquidation preferences, particularly from international investors concerned about exit risks. Given that IPOs and large acquisition deals are less common in Africa than in other regions, investors may demand more protective clauses.

Case Study: 54gene          

54gene, a Nigerian health-tech company focusing on genomics and biobanking, faced complex liquidation preferences in their early rounds due to the niche nature of their work. Investors wanted strong protection given the perceived risk of the African health-tech space. However, 54gene successfully negotiated a 1x non-participating liquidation preference, ensuring that investors would not overly dilute the founders’ share in future liquidation events. This move allowed them to retain long-term control and ownership as the business grew.        

Takeaway for African Founders: Try to negotiate for non-participating preferences or lower liquidation multiples. Investors might push for more protective terms due to the perceived higher risk of operating in African markets, but you should present your case by demonstrating the long-term sustainability and growth of your business.        

3. Board Seats and Control Provisions

The African Reality: Investors often seek more control in start-ups located in regions where the business environment is less predictable. This can lead to investors requesting significant board representation or veto rights over major decisions. While it’s important to align with investors strategically, founders must also guard against ceding too much control too early, particularly in Africa, where adaptive decision-making is essential.

Case Study: Sendy          

Sendy, a logistics start-up based in Kenya, was careful to negotiate its board composition when raising funds from foreign investors. Recognizing the importance of retaining local decision-making power, Sendy ensured that the majority of the board remained aligned with the founders’ long-term vision of scaling across East Africa. By keeping the board balanced between investors and founders, Sendy was able to maintain control while leveraging the expertise of their investors.        

Takeaway for African Founders: Board seats should be negotiated carefully. While it’s important to give investors a say, ensure you retain enough control over critical decisions, especially since the business environments in Africa can require quick pivots or adjustments. Founders should push back on overly restrictive veto rights.        

4. Convertible Notes and SAFE Agreements

Increasing Relevance in Africa: Convertible notes and Simple Agreements for Future Equity (SAFE) are becoming increasingly popular in African start-up deals. These allow founders and investors to defer the valuation discussion until a future date, which can be advantageous in Africa’s often volatile and rapidly evolving markets.

Case Study: LifeQ          

LifeQ, a South African health tech company focused on health tracking and wearable devices, used convertible notes in their early rounds to avoid locking in a valuation before their technology had matured. This strategy allowed them to demonstrate more traction and secure better terms in subsequent rounds of investment. By leveraging convertible notes, LifeQ managed to defer difficult valuation discussions until they were in a stronger market position, eventually attracting significant investments from both African and global investors.        

Takeaway for African Founders: Convertible notes or SAFE agreements may be a viable option if you're uncertain about your valuation or need more time to prove your concept. These structures can also attract investors who may be hesitant to set a hard valuation early on.        

Negotiating the Term Sheet: Strategies for African Founders

Given the uniqueness of the African start-up environment, founders must be prepared to advocate for their interests while navigating a market that investors may not fully understand.

1. Leverage Local Networks and Investors

Local investors and venture capital firms are often more attuned to the realities of doing business in Africa and may offer more favourable terms than international investors who see the market as riskier. African founders should seek out local angel investors, impact investors, or government-backed funds more aligned with long-term regional growth.

Case Study: Vezeeta          

Vezeeta, a health-tech company founded in Egypt, raised over $40 million by combining local investor support with international funding. Vezeeta’s deep knowledge of the local healthcare market allowed them to negotiate favourable terms from both domestic and international investors, securing funding that aligned with their long-term regional expansion plans across the Middle East and North Africa (MENA).        

2. Highlight Impact and Development Goals

With the rise of impact investing across Africa, founders can often negotiate better terms by aligning with investors focused on social impact. Impact investors are typically more patient with their capital and may offer terms prioritising long-term social outcomes over immediate financial returns.

Case Study: Tulaa          

Tulaa, a Kenyan agri-tech company that connects smallholder farmers with markets and financial services, attracted impact investors by focusing on the social and economic benefits of their platform. By emphasizing their role in transforming the livelihoods of smallholder farmers and supporting food security, Tulaa was able to negotiate favourable terms that prioritized long-term sustainability over quick returns.        

Conclusion: Crafting the Right Deal for African Start-ups

For African founders, understanding the nuances of a term sheet goes beyond the basic legal and financial details. It involves recognizing how operating in Africa's unique challenges and opportunities influence deal terms and negotiating power. From ensuring fair valuations to protecting equity and maintaining control, every decision in the term sheet can have a long-term impact on the success of your venture.

By carefully navigating these terms and leveraging local knowledge, founders can not only secure funding but also build sustainable partnerships with investors who understand the importance of patience and long-term growth in Africa's dynamic markets.