📜 Term Sheet Decoder

Understand every term in plain English. Know what's standard and what to push back on.

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Pre-Money & Post-Money Valuation

Critical
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What It Means

Pre-money is what your company is worth BEFORE the investment. Post-money = Pre-money + Investment amount. Your ownership % = Pre-money / Post-money.

Example

$8M pre-money + $2M investment = $10M post-money. Investors get 20% ($2M/$10M), you keep 80%.

💡 Watch for "post-money valuation including the option pool" — this dilutes founders more. Negotiate for pre-money to include the pool.

Liquidation Preference

Critical
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What It Means

Determines who gets paid first (and how much) when the company is sold. Investors usually get their money back before founders see anything.

✅ Founder-Friendly

1x non-participating: Investors get 1x their money back OR convert to common (whichever is higher)

❌ Investor-Friendly

2x+ participating: Investors get 2x back AND their % of remaining proceeds ("double dip")

Example: $10M exit, $2M invested at 20%

1x non-participating: Investors take $2M (their pref) OR 20% ($2M). Same outcome — they take $2M, you get $8M.

2x participating: Investors take $4M (2x pref) PLUS 20% of remaining $6M ($1.2M) = $5.2M. You get $4.8M.

💡 1x non-participating is standard. Push back hard on anything higher or participating.

Anti-Dilution Protection

Important
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What It Means

Protects investors if you raise a future round at a lower valuation ("down round"). Their shares get adjusted so they're less diluted.

✅ Founder-Friendly

Broad-Based Weighted Average: Mild adjustment based on how much was raised at the lower price

❌ Investor-Friendly

Full Ratchet: Investors get repriced to the lowest price ever. Devastating in a down round.

💡 Broad-based weighted average is standard. Never accept full ratchet.

Board Composition

Critical
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What It Means

Who sits on your board and makes major company decisions. Board structure determines control.

✅ Founder-Friendly

2 founders, 1 investor, 2 independents (founders + independents control)

❌ Investor-Friendly

2 founders, 2 investors, 1 "mutually agreed" independent (deadlock risk or investor control)

💡 At seed, many deals have no board seats. At Series A, push for 2-1 founder control or balanced with true independents.

Protective Provisions

Important
▼

What It Means

Actions that require investor approval (veto rights). Even with board control, you may need their consent for major decisions.

Standard Protections (Reasonable)

• Selling the company
• Changing charter/bylaws
• Issuing new senior stock
• Taking on significant debt
• Changing board size

Aggressive Protections (Push Back)

• Approving the annual budget
• Hiring/firing executives
• Any financing over $X
• Changing business direction

💡 Some protections are standard. But too many = investor veto on daily operations. Limit to truly major decisions.

Option Pool

Important
▼

What It Means

Shares reserved for future employee grants. Investors often want this created/expanded pre-money, which dilutes founders (not them).

The Pool Shuffle

"$10M pre-money" with a 15% pool in pre-money = you're really getting valued at $8.5M. The "pre-money" includes shares that don't exist yet.

💡 Negotiate pool size based on actual hiring plan, not arbitrary %. And clarify if pool is pre or post-money.

Pro-Rata Rights

Standard
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What It Means

The right (not obligation) to invest in future rounds to maintain ownership percentage. Investors want this to avoid dilution.

Why It Matters

Generally founder-friendly — investors with pro-rata are incentivized to help you succeed so they can invest more. But too many pro-rata holders can crowd out new investors.

💡 Pro-rata for leads is standard. Consider limiting for small angels or making it contingent on providing value.

Drag-Along & Tag-Along

Standard
▼

Drag-Along

If majority shareholders approve a sale, they can force ("drag") minority shareholders to sell too. Prevents holdouts from blocking deals.

Tag-Along

If founders sell their shares, investors can "tag along" and sell the same % at the same price. Protects investors from founders cashing out early.

💡 Both are standard and reasonable. Just ensure drag-along requires a meaningful majority (66%+) and fair price.

Vesting & Acceleration

Important
▼

Standard Vesting

4-year vesting with 1-year cliff. Founders may get credit for time already worked.

Acceleration Triggers

Single trigger: Vesting accelerates on acquisition (controversial — investors dislike)
Double trigger: Acceleration requires acquisition AND termination (more common and fair)

💡 Double trigger acceleration is reasonable to ask for. It protects you if acquirer wants to replace the team.

Information Rights

Standard
▼

What It Means

Investors get regular updates: monthly/quarterly financials, annual audits, board meeting access.

Standard Package

• Monthly financial statements
• Quarterly board updates
• Annual budget
• Cap table updates

💡 Reasonable and standard. Just ensure it's not burdensome (e.g., weekly reports). Monthly is fine.

📋 Quick Reference: What's Standard?

Liquidation Pref
1x non-participating
Anti-Dilution
Broad-based weighted avg
Vesting
4 years, 1-year cliff
Option Pool
10-15% (negotiate size)
Board (Seed)
Often no formal board
Board (Series A)
2 founders, 1 investor, 1-2 ind.
Pro-Rata
Yes for major investors
Drag-Along
Majority (50-66%+) approval

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