Understanding Term Sheets
Learn the key terms in a venture capital term sheet and what's negotiable.
Key Principle
The two most important things in a term sheet are valuation and liquidation preference. Everything else is secondary. Focus your negotiation energy on what matters.
Pre-Money Valuation
High negotiabilityThe company's value before the investment. Post-money = pre-money + investment.
Founder tip: Higher is better, but don't optimize only for valuation. Terms matter too.
Liquidation Preference
High negotiabilityHow proceeds are distributed in a sale. "1x non-participating" is standard and founder-friendly.
Founder tip: Avoid participating preferred or preferences greater than 1x.
Board Composition
Medium negotiabilityWho controls the board. Early stage: often 2 founders + 1 investor or independent.
Founder tip: Maintain founder control of the board as long as possible.
Pro-Rata Rights
Low negotiabilityInvestors' right to maintain ownership % in future rounds.
Founder tip: Standard for lead investors. Can cause issues if cap table gets crowded.
Anti-Dilution
Medium negotiabilityProtects investors if you raise a down round. "Broad-based weighted average" is standard.
Founder tip: Avoid "full ratchet" anti-dilution. It's very founder-unfriendly.
Vesting
Medium negotiabilityFounder shares typically vest over 4 years with a 1-year cliff.
Founder tip: Negotiate for credit for time already spent building the company.
Option Pool
High negotiabilityShares reserved for future employees. Usually 10-20% of fully diluted shares.
Founder tip: Option pool typically comes from pre-money, diluting founders. Negotiate the size.
Protective Provisions
Low negotiabilityInvestor veto rights on major decisions (selling, new debt, changing charter, etc.).
Founder tip: Standard provisions are fine. Watch for overly broad veto rights.