A plain-English walk-through of every clause in a standard venture term sheet — what's negotiable, what's boilerplate, and where founders lose the most value.
A term sheet is 3–5 pages. Founders often focus on valuation and skim the rest. The 'rest' is where you lose most of the money and most of the control. This is the walk-through.
Pre-money valuation + new investment = post-money. Investor ownership = investment / post-money. This is where you should spend real energy, but not at the cost of the terms below — a great cap with bad terms is worse than a fair cap with clean terms.
The option pool top-up is almost always taken out of pre-money — meaning founders eat the dilution, not new investors. A 10% top-up on a $10M pre-money is 10% of your equity, not the investor's. Negotiate the pool size like it matters.
1× non-participating preferred is standard and fair. 1× participating (double-dip) means investors get their money back and their pro-rata share of what's left. Anything more than 1× or participating should be a hard no at seed and Series A.
Broad-based weighted average is market. Full-ratchet (investors get the lowest price ever offered) is punitive and should be pushed back on. This matters at the next down round, which you don't plan on but must protect against.
At seed: usually 2 founder / 1 investor or 3 founder / 2 investor. At Series A: typically 2 founder / 2 investor / 1 independent. The independent seat is the one that decides tie votes — pick someone you trust and the investors respect.
A list of things you cannot do without investor consent — sell the company, raise more money, change the option pool, etc. Standard and fair, but read them carefully. Some term sheets sneak in consent rights over ordinary operating decisions.
Investors will typically re-vest existing founder equity on a 4-year schedule with a 1-year cliff. If you've been at it for two years already, negotiate credit for time served. Also negotiate double-trigger acceleration on change of control.
Drag-along lets a majority force a sale. Right of First Refusal lets investors buy any founder shares before they're sold. Both are standard. Read them for edge cases (what majority triggers drag, whether ROFR applies to secondary).
Pro-rata rights let investors buy their share of the next round to maintain ownership. Standard. Info rights (monthly financials, annual budget) are also standard. Neither should be controversial.
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