Term Sheets Decoded
What actually matters and what's negotiable
Economics Terms
The economics section covers valuation (pre-money/post-money), the option pool, and liquidation preferences. Liquidation preferences determine who gets paid first in an exit. A 1x non-participating preference means the investor gets their money back OR their pro-rata share of the exit, whichever is greater. A participating preference (also called 'double dipping') means they get their money back AND their pro-rata share — a much worse deal for founders.
Control Terms
Control terms determine who makes decisions. Board composition defines how many seats founders vs investors hold. Protective provisions give investors veto rights over specific actions — raising more capital, selling the company, changing the charter, or taking on debt. These provisions can effectively give a minority investor control over company strategy.
Anti-Dilution Protection
Anti-dilution provisions protect investors if the company raises a future round at a lower valuation (a 'down round'). Weighted average anti-dilution adjusts the investor's conversion price based on the size and price of the down round — this is the standard. Full ratchet anti-dilution resets the price to the new lower price entirely — this is aggressive and founder-unfriendly.
What to Actually Negotiate
Focus your negotiation energy on: (1) Valuation — but only within a reasonable range for your stage. (2) Liquidation preference — fight for 1x non-participating. (3) Board composition — maintain founder control as long as possible. (4) Option pool size — negotiate the percentage down or argue for post-money inclusion. The rest of the term sheet is largely standardized and not worth burning relationship capital over.