Term Sheet
The Series A Term Sheet, Clause by Clause
The two-page document that decides who really owns and controls a startup.
A term sheet is non-binding on price but sets the template every later document copies. Read it not as legalese but as an answer to two questions: who owns what if things go well, and who controls what while we find out. The numbers below are illustrative, not any real company's.
1. Valuation & new money
OriginalInvestors will invest $5,000,000 at a pre-money valuation of $15,000,000, representing 25% of the fully-diluted post-money capitalization.
What it meansPost-money = pre-money + new money = $20M. The investor's $5M buys $5M / $20M = 25%. Always confirm whether a percentage is quoted pre- or post- money, and whether it is fully-diluted — the two conventions can differ by several points of ownership.
2. Liquidation preference
OriginalThe Series A shall be entitled to receive, prior to any distribution to common, an amount equal to 1x the original issue price, non-participating.
What it meansIn a sale, the investor takes their money back first. '1x non-participating' means they choose the greater of (a) their $5M back or (b) converting to 25% of the proceeds — not both. 'Participating' (double-dip) would let them take the $5M and 25% of the rest; resist it. The multiple (1x vs 2x, 3x) is the single most value-shifting number after valuation.
3. The option pool shuffle
OriginalPrior to closing, the Company shall reserve an unallocated option pool equal to 15% of the post-money fully-diluted capitalization.
What it meansWatch the word prior. Creating the pool before the money comes in dilutes only the founders, not the new investor. A 15% pool carved from pre-money quietly lowers the true pre-money valuation. Negotiating the pool to what hiring actually needs — and whether it comes from pre- or post-money — is worth real percentage points.
4. Anti-dilution
OriginalThe conversion price of the Series A shall be subject to broad-based weighted-average anti-dilution adjustment.
What it meansIf a later round prices shares below this one (a 'down round'), the investor's shares reprice in their favour. 'Broad-based weighted-average' is the founder-friendly version — it softens the adjustment by counting the whole cap table. The alternative, 'full ratchet', is punitive: it reprices as if the investor had always paid the lower price. Prefer weighted-average.
5. Board & protective provisions
OriginalThe Board shall consist of five members: two designated by common, two by the Series A, and one independent mutually agreed. Certain actions shall require the approval of the Series A director.
What it meansControl is separate from ownership. Owning 25% but holding a veto over budgets, new debt, selling the company, or issuing new shares can matter more than the percentage. Read the list of 'protective provisions' as carefully as the price — it defines what the founders can no longer do alone.