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What the Term Sheet isn’t telling you: Terms every UK Founder should know

Receiving a term sheet is a significant step in any fundraising process. The document is usually short and written in plain commercial language, which can make it seem more straightforward than it is. That impression is misleading, because despite its informal tone, a term sheet sets out the economic and control terms that the long-form documents will later implement.

A term sheet is usually expressed to be non-binding, other than the exclusivity, confidentiality and governing law and jurisdiction clauses. In practice it is difficult to renegotiate the key commercial terms set out in the term sheet without risking the deal. Founders should therefore take the time to understand the main terms before agreeing to them.

Set out below are five provisions that typically have the biggest impact on founder ownership, control and outcomes.

Price per share and the option pool

Valuation is often the figure founders focus on first, but the headline number does not by itself determine the price per share. That price is calculated by dividing the pre-money valuation by the share count used as the denominator, and investors will usually ask for that denominator to be the fully diluted share capital, meaning existing shares plus all outstanding options, warrants and any unallocated option pool. Founders are better served by the narrower issued share capital basis, meaning only the shares actually held by shareholders today, but should expect the investor’s fully diluted position to be the starting position rather than something unusual. Using the fully diluted basis lowers the price per share and increases the number of shares issued to the investor, so the point is worth negotiating rather than just accepting on the assumption that the investor’s starting position is fixed.

The unallocated option pool referred to above is not a fixed quantity either, and investors will often ask for a pool of around 10 to 15 per cent to be created ahead of their money coming in. Pre-money creation, counted on the fully diluted basis described above, is the more common outcome, and it means the cost of the pool falls entirely on the founders rather than being shared with the new investor. Founders can and often do negotiate for the pool, or part of it, to be created post-money instead, so that the cost is shared with the incoming investor. Founders should ask exactly when the pool is being created, how it is being sized and whether it is calculated pre-money or post-money, since identical headline numbers can produce materially different founder outcomes depending on the answer.

Liquidation preference

Early-stage investors in the UK may invest through preference shares, which carry additional rights on an exit. The most important of these is the liquidation preference, which determines the order in which proceeds are distributed.

A standard position is a 1x liquidation preference, meaning the investor receives an amount equal to their investment before ordinary shareholders receive anything. Liquidation preferences are either non-participating or participating. A non-participating preference requires the investor to choose between taking their preference or converting into ordinary shares, and in a strong exit a non-participating investor will convert rather than take the preference, since their pro rata share of the proceeds as an ordinary shareholder is worth more than the fixed preference amount. A participating preference allows the investor to take their preference and then share in the remaining proceeds as well, regardless of how strong the exit is.

Participating preferences and multiples above 1x can cut founder returns substantially in moderate exits and are generally considered aggressive in early-stage UK deals.

Anti-dilution protection

Anti-dilution provisions protect investors if a future funding round is raised at a lower valuation. The most founder-unfriendly version is a full ratchet, which effectively resets the investor’s conversion price to the lowest future price regardless of the size of the round. This means that when the investor’s preference shares eventually convert into ordinary shares, typically on exit, each preference share converts into a larger number of ordinary shares than it would have done at the original price, resulting in substantial additional dilution for founders and other shareholders.

A weighted average mechanism is a more moderate alternative to full ratchet, adjusting the investor’s price by reference to both the price and the number of shares issued in the down round rather than resetting it outright. Broad-based weighted average anti-dilution includes the option pool and outstanding convertible securities in that calculation, producing a smaller price adjustment than a narrow-based calculation, which counts only issued share capital. UK deals gravitate towards the broad-based version because it spreads the impact of a down round more thinly across the cap table.

If a term sheet refers to anti-dilution without specifying the mechanism, founders should ask for clarification.

Board rights and investor control

Investors will usually seek governance rights alongside their investment, typically the right to appoint a director or observer, a list of reserved matters requiring investor consent, and ongoing information rights such as monthly management accounts and annual budgets. Reserved matters commonly cover significant actions such as issuing shares, amending constitutional documents, incurring debt above an agreed threshold or selling the business, and are usually subject to a consent threshold tied to the investor’s shareholding rather than a single investor’s veto.

These rights are meant to safeguard the investment rather than interfere with day-to-day management, though problems tend to arise when consent rights are drafted too broadly or restrict operational decision-making as the company grows.

Leaver and vesting provisions

Term sheets often include leaver provisions, which govern what happens to a founder’s shares if they leave the company. Investors often require founders to agree to reverse vesting, usually over a four-year period with a one-year cliff. Unvested shares can be bought back or cancelled if a founder departs early.

Term sheets also distinguish between good leavers and bad leavers; a bad leaver can lose all their shares, sometimes for nominal value, while a good leaver usually keeps their vested shares. The definitions used are therefore critical and can shift from one deal to the next.

Leaver arrangements vary from one investor and one deal to the next, so a term sheet reference to “standard leaver provisions” tells a founder very little on its own. The actual definitions used should be read and understood before anything is agreed.

Negotiating the Term Sheet

A term sheet does more than record commercial terms, because it also sets the reference points that the long-form agreements will later expand on. Understanding the mechanics behind each provision, not just the headline terms, makes it easier to negotiate and to spot points that depart from market practice.

If a term is unclear or looks aggressive, it is worth asking why it has been included and whether it can be removed or narrowed. Raising that question is far easier while the term sheet is still open for discussion than after signature, so involving advisers at this stage is worthwhile.

How we can help

We regularly advise founders, investors and growth companies on term sheets, investment rounds and fundraising documentation.  Whether you’re raising capital for the first time or negotiating a later-stage investment, we can help you navigate the process and protect your position.  If you would like advice on any of the issues covered in this article, please get in touch.  You can also find out more about our experience in this area by visiting my profile page.

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From Prize Draw to Prize Deal: Selling an Online Prize Competition Business

The prize draws and competitions (PDC) sector has evolved rapidly over the last few years. What began as an entrepreneurial, founder-led market is now attracting sophisticated buyers, and with that comes a whole new level of scrutiny on how these businesses are actually built and run.

We’ve acted for sellers on deals in this sector, so we know first-hand what buyers focus on, where the risks tend to come from, and how you can best set yourself up for a clean exit.

You may have heard that the PDC sector is entering a new regulatory era. The UK Government-backed Voluntary Code of Good Practice for Prize Draw Operators (Voluntary Code) came into force in May 2026, with a strong focus on player protection, transparency and accountability (no great surprises there). While it’s technically voluntary, buyers are already treating it as the baseline standard, and the Government has made clear that tighter regulation may follow if standards don’t improve.

If you’re an operator of a prize competition business and you’re thinking about selling, the bottom line is that the earlier you start getting ready, the better.

What makes this sector different

Selling a prize competition business isn’t like selling most other small businesses. Things you probably thought of as day-to-day operational matters, such as how your free entry route works, your email consent wording and how you handle complaints can suddenly become sticking points in a deal. And now that the Voluntary Code is in play, buyers are increasingly focused not just on what you’ve done historically, but on whether your business is built to survive tighter regulation in the future.

That means corporate, regulatory, employment, consumer protection, advertising, data privacy, tax and intellectual property issues can all come into play at once.

The key areas buyers focus on

In our experience, most operators of prize competition businesses are surprised by just how much detail buyers go into in their due diligence investigations. We summarise below the areas that in our experience receive most scrutiny:

1. The Voluntary Code

As mentioned above, even though the Voluntary Code is voluntary and perceived as a lighter touch approach from the Government, buyers are treating it as a serious indicator of how well-run a business is. If your compliance has historically been “light touch”, expect questions. Buyers will want to know about self-exclusion tools, customer spend controls, credit card restrictions and complaints processes.

2. Free entry route compliance

This is one of the most heavily scrutinised areas in any prize competition deal. A buyer will want to know that your free entry route has genuinely been operated in a compliant and transparent manner. Buyers will review:

• website wording;
• terms and conditions;
• customer journey design;
• marketing materials; and
• operational evidence showing how free entries were processed.

If the free entry mechanism has been poorly implemented, that can affect your valuation and may result in the buyer insisting on greater contractual protections e.g. stronger warranties or an indemnity (entitling the buyer to pound for pound recovery for any losses it suffers) to cover any legal risk they’re taking on.

3. Advertising and marketing practices

Marketing is one of the riskiest areas in any prize competition deal. Buyers will typically look into:

• paid advertising campaigns;
• Advertising Standards Agency (ASA) compliance;
• promotional claims;
• winner announcements; and
• representations relating to odds or prizes.

If you can show that your marketing has been run properly, that will go a long way with any buyer.

4. Customer data and CRM value

Your customer database is the jewel in the crown. That means your GDPR compliance and data practices are likely to get a lot more attention than you might expect. Areas commonly reviewed include:

• privacy policies;
• consent records;
• email and SMS marketing permissions;
• use of tracking technologies; and
• third-party data sharing arrangements.

A well-organised customer database with clean, properly obtained consents is one of the things a buyer will scrutinise closely in its legal due diligence.

5. Payment providers and banking relationships

Your payment processing setup matters more than many PDC operators realise. Buyers will want to understand:

• merchant acquiring relationships;
• chargeback history;
• anti-fraud systems;
• KYC processes; and
• any historical account suspensions or investigations.

Any instability in your payment infrastructure e.g. account suspensions, high chargebacks and processor restrictions can become a deal issue and affect both valuation and deal structure.

6. VAT and historic tax risk

VAT treatment is receiving increased attention in transactions in the PDC sector. HMRC has clarified its position on whether entry fees constitute consideration for a taxable supply, and buyers are now specifically investigating:

• whether VAT has been correctly accounted for on entry fees;
• the risk of historic underpayment;
• the robustness of the business’s tax advice and filings; and
• whether any contingent VAT exposure should be reflected in the deal.

In short, if there’s a VAT problem, it’s likely to affect the scope of the tax warranties and indemnities the buyer requires, and may result in part of the purchase price being deferred or held in escrow. A buyer may also require the right to set off any future claim directly against that deferred amount before it’s released to you.

7. Intellectual property and brand protection

Strong branding has become a major differentiator in an increasingly crowded market. Buyers are now paying close attention to:

• trade mark protection;
• ownership of creative assets;
• software ownership;
• platform licensing arrangements; and
• social media account control.

One of the most common avoidable problems is where core assets e.g. the platform, creative content or social media accounts are held personally by founders, developers or marketing agencies rather than by the company itself. This should ideally be resolved before any sale process begins.

Warranties and disclosure – what sellers need to know

Buyers in the PDC sector tend to expect detailed warranties covering, among other more routine matters, compliance with the Gambling Act 2005, free entry route operation, advertising, ASA and CAP Code compliance, GDPR and customer consent, payment processing arrangements and IP ownership.

Alongside the warranties comes the disclosure process. This is where you have the opportunity to flag anything to the buyer that might not be entirely squeaky clean. Even well-run operators will typically have historic issues that need careful handling. Identifying these issues early, managing them through disclosure and ensuring operators are appropriately protected against future warranty claims are among the most important things a seller’s legal team can do.

We have significant experience advising prize competition operators through this process, we know where the issues tend to arise and how to handle them in a way that protects sellers and keeps transactions on track.

Preparing for exit

If a sale is on your radar, even if it’s a couple of years away, the best time to start getting ready is now. Doing the groundwork in advance makes the whole process smoother, keeps you in a stronger negotiating position, and helps protect the value you’ve built. The smoothest sales involve businesses that already have:

• well-maintained corporate records, including up-to-date registers, filed accounts and a clear cap table;
• properly drafted, sector-compliant terms and conditions, including competition rules that will hold up to scrutiny;
• written contracts in place with employees, contractors, suppliers and any commercial partners;
• documented compliance procedures covering gambling law, consumer protection and data privacy obligations;
• a lawful basis for all marketing activity and properly obtained, documented customer consents; and
• clarity over intellectual property ownership, including branding, software and any licensed content.

How we can help

We’ve advised on deals in this sector and we know how they work. Whether you’ve had an approach from a potential buyer and need to move quickly, or you’re thinking about a sale further down the line and want to get properly prepared, we can help at every stage, from getting your house in order through to negotiating and closing a deal.

We’ve advised on deals in this sector and we know how they work, including recently advising on the sale of Rev Comps to Winvia Entertainment.

To discuss the content of this article, please contact Ben Gale, Corporate M&A partner.

This article is designed for general information purposes only and does not constitute legal advice. The issues and scenarios discussed are illustrative and do not reflect any specific transaction or matter we have advised on.

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Quastels Advises £80m-turnover Rev Corp Ltd on sale of business and assets to Winvia Entertainment

Quastels has advised Rev Corp Ltd (“Rev Comps“) on the sale of its business and assets to Winvia Entertainment (“Winvia“), a technology-led entertainment group.

Rev comps is a digitally-driven UK prize competition platform which has build a strong reputation in its market, underpinned by a highly engaged customer base and consistent commercial performance. The transaction represents a significant milestone for the business, enabling it to benefit from Winvia’s proprietary technology and broader growth platform.

Under the agreement, Winvia will pay £11.8m in cash in three instalments. Following completion, key members of the Rev Comps team are expected to remain involved in the business, supporting continuity and future development as part of the Winvia group.

Quastels advised Rev Corp Ltd on all legal aspects of the transaction. The team was led by Ben Gale (Partner, Corporate), and supported by Charlotte Vallins (Partner, Commercial Real Estate), Ann-Maree Blake (Legal Director, Commercial), Jamie Crocker (Solicitor, Corporate), Ramona Bakshi (Solicitor, Employment), Patrick Higgins (Solicitor, Employment) and Imogen Burrows (Trainee, Corporate).

Gerald Edelman acted as corporate finance advisers to Rev Corp Ltd.

Comment

“We are delighted to have supported Rev Corp Ltd on the agreed sale of its business and assets to Winvia.  Rev Comps has built a strong platform with an engaged customer base and a compelling position in a fast-evolving sector. The transaction reflects the quality of the business and provides a clear pathway for its next stage of development.  It was a pleasure working alongside the Rev Comps team and Gerald Edelman to successfully agree the transaction and we look forward to working with the parties through to a successful completion.”

– Ben Gale, Corporate

Client Testimonial

“Quastels – an incredibly efficient and personable law firm with a team that’s second to none.

I clicked with Ben and the team from our very first introductory call. This wasn’t your tyrpical lawyers’ meeting filled with cryptic lawyer jargon, it was approachable, clear and refreshingly straightforward. Ben and the team were relatable and easy to talk to. We discussed the deal in detail, but what really stood out was the ability to have light-hearted conversations alongside the more serious aspects – that’s what really set Quastels apart for me.

The beauty of this whole experience was Quastels’ ability to cater to our needs. I hate back-to-back phone calls and endless meetings. Ben realised this early, and we quickly established a straightforward and modern way of working. The flexibility and responsiveness set Quastels apart form my previous experiences with lawyers.

We were able to exchange on the deal in record time, and I firmly believe this was not only due to the fantastic team at Quastels, but also the speed and efficiency of communication.

Both sides needed to get the deal over the line quickly for various reasons, and when it came to meeting that deadline, the team went above and beyond, working all hours to get it done. I was receiving updates from Ben at 3.30am on Sunday morning, the evening of exchange, a clear reflection of his commitment and work ethic.

Ben is someone you can rely on to knuckle down and make it count when everything is on the line. Quick replies to any questions and an attitude to work that is rare in the current world, Ben and the team really did look after us exceptionally well and we’ve had some laughs along the way too.

I wouldn’t hesitate to use Quastels again. They have been superb from start to finish and will be my go-to firm for any future legal work.

Thank you for helping make this deal happen, for protecting our position throughout and for the fantastic service, advice and professionalism (with some light-hearted banter mixed in with it) from start to finish. I can’t say enough good things about you all.”

– Robert Savage

To find out more about how we can assist on deals in the Prize Competition sector, see this recent article by Ben Gale, Corporate Partner: From Prize Draw to Prize Deal: Selling an Online Prize Competition Business.

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