Deeptech Founders Gain Leverage in Term Sheets, Securing Fair Deals

Founders of deeptech companies are gaining leverage in term sheets, securing fair deals due to a surge in investor interest in the UK.

The current UK funding landscape is split between AI and deeptech companies, which are gaining more investor interest and getting more founder-friendly terms by VCs, and businesses in other sectors which are facing stricter terms.

Investors are concentrating their capital into fewer, high-growth companies, with larger deals making up 31% of all term sheets, up from 26% in 2024.

Despite the surge in AI and deeptech, fintech and life sciences also remain two of the largest areas of venture investment in the UK.

## High Demand in Deeptech Sectors

The demand for deeptech companies is high, with investors seeking to fund companies that are solving problems using AI. This has given founders in deeptech sectors the leverage to ask for terms that protect both their equity and their autonomy.

Founders in deeptech sectors are able to command a premium and terms are often founder-friendly. These terms can include keeping majority control of board decisions, and limiting the number of day-to-day decisions that require investor approval so the company can execute quickly.

## Understanding Valuation and Control Rights

When a founder receives a term sheet, it can be easy to fixate on valuation. However, the underlying legal framework, dictating things such as board control and what happens if a cofounder leaves, is often more important.

Investors have specific returns they must hit, so a high valuation comes with structural terms. A liquidation preference is a clause that decides who gets paid first and how much money they receive when a company exits, closes down or goes bankrupt.

It's designed to protect investors by making sure they get their money back before other shareholders.

## Capital Dynamics

The source and structure of capital often influence the terms a founder will receive. In the UK, there's currently a contrast between the funding landscape in London and other regions.

London benefits from a concentrated pool of capital, increasing competition among investors, which can often translate into more founder-friendly terms.

However, this is starting to change, with over 50% of seed deals in sectors like life sciences, cleantech and energy taking place in regions outside London, driven by Enterprise Investment Schemes (EIS) and Venture Capital Trust (VCT) funds.

The EIS is a UK government initiative designed to help smaller, higher-risk startups raise capital by offering generous tax reliefs to individual investors. Investors can gain 30% income tax relief on investments up to £1m per tax year.

Founders in deeptech sectors are able to command a premium and terms are often founder-friendly.

| Fund Type | Description | | --- | --- | | EIS | Enterprise Investment Scheme, offering tax reliefs to individual investors | | VCT | Venture Capital Trust, a publicly listed company pooling money from individual investors to fund smaller businesses |

The main goal of EIS funds and VCT's is capital protection for their investors. Instead of relying on one big success, they aim for six to eight of their 10 investments to yield a return.

That's in contrast to a traditional, "American-style" VC model built on the expectation that out of 10 investments, one "moonshot" will return the entire fund.

Because EIS and VCT funds can't afford high failure rates, they actively mitigate risk. Term sheets from these funds often include more rigorous terms such as strict financial reporting requirements, consent rights and often with arrangement and monitoring fees, which founders should be aware of.