Diversity, equity, and inclusion clauses – reflecting ESG priorities in venture capital

read time: 6 mins

16.01.25

Sam Brown

In recent years, the focus on environmental, social, and governance principles or ESG has reshaped the venture capital landscape. As part of this shift, diversity, equity, and inclusion (DEI) clauses have emerged as a critical feature in term sheets, reflecting a commitment to building inclusive, equitable, and diverse organisations.

For investors, diversity clauses signal alignment with ESG priorities and contribute to long-term value creation. For founders, these clauses offer an opportunity to embed inclusive practices into the company’s DNA from the outset.

This article in our ‘Anatomy of a term sheet’ series explores how diversity clauses are structured in venture capital documentation, their practical implications, and how founders and investors can align on achieving shared ESG goals.

What are diversity, equity and inclusion clauses?

DEI clauses in term sheets formalise a company’s commitment to fostering diversity, equity, and inclusion in its governance, hiring practices, and organisational culture. They can take the form of:

Commitments to governance diversity: ensuring representation of underrepresented groups on the board or in senior management.
Hiring and retention practices: promoting diverse recruitment strategies and equitable employee treatment.
Reporting and accountability: requiring the company to track and report progress on its DEI objectives.

DEI clauses are part of a broader ESG strategy, emphasising the role of social impact in building sustainable and successful businesses.

Key features of DEI clauses

Governance representation

Board diversity: requiring companies to maintain a certain percentage of board members from underrepresented groups.
Senior leadership: encouraging diversity in c-suite appointments and succession planning.

Example:

"the company shall ensure that at least 30% of board members are women or individuals from other underrepresented groups within 24 months of investment."

Diversity in recruitment

Promoting inclusive hiring practices by mandating diverse candidate pools for open positions.
Partnering with organisations or programmes focused on underrepresented talent.

Example:

"the company agrees to adopt a recruitment policy that requires interviewing candidates from underrepresented groups for all senior management positions."

Employee equity and inclusion

Implementing policies to ensure fair treatment and equal pay across all demographics.
Establishing training programmes to foster an inclusive workplace culture.

Example:

"the company shall implement an equal pay policy and conduct annual audits to ensure equity across all employee demographics."

ESG and DEI reporting

Requiring the company to measure and report progress on DEI objectives, often through annual ESG reports or board updates.
Ensuring transparency and accountability to both investors and stakeholders.

Example:

"the company shall report annually to the board on its progress towards achieving diversity, equity and inclusion targets, including recruitment metrics and employee satisfaction surveys."

Why DEI clauses matter in venture capital

For investors

Value creation: research indicates that diverse organisations often outperform their peers due to enhanced decision-making and innovation.
Risk mitigation: inclusive practices help mitigate reputational risks and strengthen resilience against social and governance challenges.
Stakeholder expectations: institutional investors and limited partners increasingly prioritise ESG-aligned investments, making diversity, equity and inclusion a key focus area.

For founders

Culture and talent: embedding diversity, equity and inclusion principles early helps attract and retain top talent, fostering a positive organisational culture.
Market positioning: demonstrating a commitment to diversity, equity and inclusion can enhance the company’s reputation with customers, partners, and future investors.
Scalability: companies that prioritise inclusion are better positioned to scale sustainably, avoiding issues related to inequity or exclusion.

Practical considerations for structuring diversity, equity and inclusion clauses

Customisation to company stage

Early-stage companies may need flexibility to adopt DEI practices incrementally, while later-stage companies can commit to more immediate goals.
Investors should consider the company’s resources and size when setting expectations.

Setting realistic targets

DEI clauses should include achievable objectives, such as timeframes for increasing board diversity or implementing recruitment policies.
Unrealistic or overly prescriptive targets may create unnecessary pressure without delivering meaningful results.

Balancing accountability and autonomy

Investors should monitor DEI progress without micromanaging the company’s operations.
Founders should have the flexibility to adapt DEI initiatives to their unique organisational context.

Incentivising progress

Linking DEI performance to management incentives or investor follow-on funding can encourage sustained progress.

Example of a DEI clause in a term sheet

Clause example:

"the company agrees to:

Implement a board diversity policy within 12 months of investment, ensuring at least 30% representation of women or individuals from underrepresented groups on the board within 24 months.
Adopt a recruitment policy requiring diverse candidate pools for senior management positions.
Report annually to the board on progress towards DEI objectives, including hiring metrics, employee satisfaction surveys, and pay equity audits."

Challenges in implementing DEI clauses

Resource constraints

Early-stage companies may lack the resources to implement robust DEI initiatives immediately. Founders and investors should agree on phased implementation plans.

Measuring impact

Quantifying progress on DEI objectives can be challenging, particularly for small companies with limited data.

Potential pushback

Founders may perceive DEI clauses as an administrative burden, particularly if the requirements are overly prescriptive.

Avoiding tokenism

DEI clauses should focus on meaningful actions and outcomes rather than symbolic gestures.

Analysis: founders’ perspective vs investors’ perspective

	Founders' perspective	Investors' perspective
Motivations	Founders view DEI as a means to build a strong company culture and attract top talent but may worry about the administrative burden or feasibility of meeting stringent targets.	Investors see DEI as a cornerstone of ESG strategy, contributing to value creation and aligning with stakeholder expectations. They prioritise measurable progress to ensure accountability.
Preferred position	Commit to achievable DEI objectives aligned with the company’s growth stage. Focus on incremental implementation to balance ambition with operational realities. Ensure DEI clauses provide flexibility for evolving organisational needs.	Include specific, actionable DEI targets tied to governance, hiring, and reporting. Monitor progress through regular reporting and board updates. Balance accountability with founder autonomy to avoid overreach.
Risks	Overly rigid or unrealistic DEI requirements may create unnecessary stress or distract from core business priorities.	Poorly defined or unachievable DEI clauses may lead to frustration or reputational risks for the investor.
Where they align	Both founders and investors benefit from DEI clauses that set clear, achievable objectives while promoting long-term value creation. Transparency and collaboration are key to ensuring progress without overburdening the company.

In summary

DEI clauses are becoming an integral part of venture capital term sheets, reflecting the growing importance of ESG principles in the investment landscape. For founders, they represent an opportunity to build inclusive and resilient organisations. For investors, they ensure alignment with stakeholder expectations and long-term value creation.

By structuring DEI clauses thoughtfully and tailoring them to the company’s stage and resources, founders and investors can achieve shared goals of diversity, equity, and inclusion.

Read the next article in our "Anatomy of a term sheet" series, where we’ll explore sustainability provisions and examine how these clauses support environmentally responsible practices and align companies with broader ESG priorities.

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.

Our anatomy of a term sheet series

Our 'Anatomy of a term sheet' series breaks down each critical section of a venture capital term sheet, offering technical insights and practical real-world examples to help founders with their fundraising journey.

Our aim is to demystify term sheets and empower founders and their advisors to navigate negotiations with clarity and confidence.