A term sheet outlines the key terms of an investment before formal legal documents. Critical terms to understand: (1) Valuation: pre-money vs. post-money—Post = Pre + Investment. (2) Liquidation preference: 1x non-participating is founder-friendly; participating preferred favors investors. (3) Anti-dilution: protects investors if future rounds are at lower valuation. (4) Board composition: who controls decisions. (5) Pro-rata rights: investor's right to maintain ownership. (6) Vesting: founder equity earning schedule. (7) Option pool: equity reserved for employees (dilutes founders). Red flags: >1x liquidation, full ratchet anti-dilution, excessive board control, aggressive redemption rights.
Key Term Sheet Takeaways
- Valuation: Post-money = Pre-money + Investment
- Liquidation preference: 1x non-participating is standard
- Anti-dilution: weighted average is founder-friendly
- Board composition determines control
- Pro-rata rights maintain investor ownership
- Option pool dilutes founders pre-investment
- Red flag: >1x liquidation preference
- Red flag: full ratchet anti-dilution
- Red flag: investor board majority
- Get lawyer to review before signing
Term Sheet Statistics
1x
standard liquidation preference
15-20%
typical option pool
20-25%
typical seed dilution
3-5
typical board seats