How to Understand Term Sheets in Venture Capital

Before you sign that Term Sheet, here’s what every founder needs to know.... Ever wondered what really happens when you sign a term sheet? It’s setting the ground rules for your company’s future, defining your relationship with investors, and mapping out what happens in good times and bad. I’ve seen founders dive in headfirst without realizing what they’ve committed to, only to feel stuck later on. Here’s a breakdown of the essentials every founder needs to get right: Liquidation Preference 💸 Picture this: there’s a big exit on the horizon, but who gets paid first? That’s where liquidation preference comes in. A "1x liquidation preference" means investors get their money back first. Some term sheets even add a kicker with a “participating preference,” where investors get paid before you. This is a big one—make sure you know where your payout stands. Anti-Dilution 🔍 Anti-dilution clauses are there to protect them if the next round’s valuation is lower. Terms like "full ratchet" (investors’ shares reset as if they bought at the lower price) or "weighted average" (only a partial reset) can make or break your cap table. Vesting Schedules ⏳ Think vesting is just for employees? Think again. Investors want you in it for the long haul, so they often ask founders to vest over time. A “4-year vesting with a 1-year cliff” means you’ve got to stay a year before any equity kicks in. Protects everyone involved, but make sure it aligns with your long-term plan. Board Composition & Voting Rights 🗳️ Who’s in control? That’s what board seats and voting rights boil down to. Investors may want a seat at the table and a say in big decisions (like future fundraising). Founders, a balanced board is key to protecting your vision and maintaining control over your company’s future. Pro-Rata Rights 📈 These rights allow investors to keep their ownership stake in future rounds. Sounds simple, but it can impact your ability to bring in new investors later. Get clear on who has these rights and how they affect your flexibility down the road. Drag-Along and Tag-Along Rights 🚀 Drag-along rights mean majority shareholders can require everyone to sell if they decide to exit, making a smoother process for everyone. Tag-along lets minority shareholders sell under the same terms as the majority. Both can be founder-friendly, but they’re big moves—know what you’re agreeing to. Future Investment Rounds & Pay-to-Play 💸 Some term sheets have "pay-to-play," meaning investors have to invest in future rounds to keep their terms. It can work in your favor, ensuring continued support, but founders—be strategic about how much you want each investor involved in the future. Bottom line? The term sheet isn’t just the first step to getting funded; it’s about setting the right foundation for the journey ahead. Every term has weight, and every clause can shape your future. Sign wisely. #startups #foundertips #venturecapital

The first time I looked at a VC term sheet, I made the classic founder move: Scanned for valuation. Mentally celebrated. Big mistake. Because the stuff that actually matters? It’s hidden in the fine print. Here are 3 terms that quietly screw over founders: 1) Liquidation Preference – If it’s 2x participating, investors get paid twice before you see a dime. That “big exit”? Might feel more like a rounding error. 2) Board Control – You built the company, but if the board’s stacked with VCs… they can fire you. Even if you’re hitting your numbers. 3) Option Pool Shuffle – If VCs ask to increase the option pool before they invest, guess who gets diluted? You. Always ask: pre- or post-money? Too many founders learn this stuff the hard way. You don’t raise your Series A to get blindsided. >> Read the term sheet. >> Understand the incentives. >> Protect your equity. What’s the sneakiest term you’ve seen on a VC term sheet? Did you negotiate your first deal solo or bring in a lawyer? What’s one thing you wish you knew before signing? Teaser: we are working on an agent that will make sure that you don't sign your company away: upload and we will flag what you need to know. #startups #founders #venturecapital #fundraising

With VC term sheets, follow the "Rule of Three": Focus on the 3 most important issues to negotiate—here they are ⬇️ 1) DILUTION Not just valuation (pre-money vs. post-money) but WHAT METHOD are you using to calculate the effective price per share? Example: VC offers $2M on a $10M pre-money valuation but what about: (i) option pool expansion, (ii) Notes & Safes priced into effective pre-money vs. total round size, and (iii) how to handle ambiguities (founder-friendly or investor-friendly)? "The price per share (PPS) of the shares of Series Seed Preferred Stock shall be the price determined on the basis of a FULLY-DILUTED PRE-money valuation of $10M (which pre-money valuation shall include an unallocated and uncommitted employee option pool representing 10% of the fully-diluted post-money capitalization)." This is NVCA's term sheet language. You could also double confirm the conversion method (Pre-Money Method, Percentage-Ownership Method and the Dollar Invested Method), understanding where ambiguities will lie. 2) PROTECTIVE PROVISIONS (Veto Rights) Next, protective provisions are veto rights granted to investors over specific corporate actions. While many are "standard," both the VC and founders should know their impact. Lead investors will often ask for and receive M&A veto rights or vetoes over future financings that "adversely affects" the investor's stock, or even if the company can raise a financing. For example, Evan Spiegel, the CEO and co-founder of Snap, was shocked to find out that his seed round's lead VC investor had a 100% right to say no to his next VC partner ("increases or decreases the authorized number of shares of any class or series of capital stock of the Company"). Evan was so upset that his lawyers said everything was standard that he paid the VC to remove that right on the next round & when the company went public, Evan stripped non-cofounders of ALL rights to vote. 3) BOARD OF DIRECTORS The Board of Directors is in charge of the company. But as recent Delaware court decisions have shown us (Tesla, Moelis, Crown Castle) the Board is not infallible and its vote doesn't always count. Ex: Many years ago while I was representing a startup, the lead VC tried to remove our CEO and insert the VC's top pick. However, that person was also a long-time friend of the VC's. While it might have happened without our pushback, we made it clear that if the VC decided to go through with those plans, we would assert that there was a conflict of interest which would require disclosures and a vote by the disinterested board members. Even if the Board has control it doesn't always mean that they can exercise it. Boards of director structures are important - but probably less so at the earliest stages. Follow the "Rule of 3"—dilution, protective provisions & board composition—& you can negotiate a term sheet that aligns with all interests that can lead to more favorable and clear outcomes for everyone. #venturecapital #startups

I only cared about getting the highest valuation when I raised my pre-seed. This is a mistake that 95% of underrepresented founders make. Here are three things besides valuation to consider when evaluating a term sheet 👇 Valuation matters, sure. But you're missing the bigger picture if it’s all you focus on. Most founders get caught up chasing the highest valuation, and in turn, they take money from whoever has the largest number on the term sheet. However, the term sheet is packed with other clauses that can seriously impact your future as a founder. So before you pop the champagne over a significant number, here are three things you should consider: 1. Board Composition and Control: This is about who’s calling the shots. Giving up a board seat too early could mean losing some control over the company you built. Giving up a seat around Series A is normal, but doing it too soon can limit your input in the early stages when it matters most. 2. Liquidation Preferences: This is a big one. Liquidation preferences dictate how proceeds are distributed if your company gets acquired or goes public. Even if you raise at a high valuation, liquidation preferences could mean your investors get paid first—and you end up with less than expected. 3. Anti-Dilution Provisions: Anti-dilution clauses protect your investors, not you. If you raise another round at a lower valuation (a “down round”), they keep their equity share while you get diluted. This means your ownership stake shrinks even as you work to grow the company. My point? Yes, valuation is essential. But you might get burned down the line if only focused on that number. Make sure you’re looking at the whole term sheet—board control, liquidation preferences, and anti-dilution clauses could end up being just as important (if not more) than your valuation. Fundraising is more than just getting the highest offer; it’s about protecting yourself and the business you’ve worked hard to build. #startups #fundraising #venturecapital

Securing a term sheet in today's environment is challenging, but valuation isn't everything. Watch out for these red flags: 1) Excessive control provisions that limit your autonomy. I have seen veto rights, controls on hiring and firing, control on future funding rounds, or overburdensome board constructions. 2) Unreasonable deadlines for milestones. I have seen unsophisticated investors set key milestones in an attempt to “encourage” the founders to deliver, but in reality rush the team leading to mistakes and regrets. 3) Onerous liquidation preferences that can severely dilute founders. Liquidation preference determines how proceeds from an exit are distributed. I have seen 3x or worse on some term sheets. 4) Misaligned incentives prioritizing investor gains over company health. I have seen high interest rates, ratchet provisions that increase investor ownership, and even uncapped returns. 5) Burdensome reporting requirements that distract your team. I have seen groups ask for audited financials monthly and constant KPI updates. Don’t be afraid to negotiate or walk away from a term sheet. The terms you agree to now will impact your business for years to come. Any other red flags you've seen that would be helpful for founders to know? #venturecapital #startups #founders #termsheets #fundraising #earlystage