Startup Term Sheet Guide: What to Negotiate and What to Accept
Most term sheet negotiation happens on a few high-impact clauses. Understanding which terms move the economics and which are primarily protective lets you focus on what matters and build investor relationships on the rest.
Valuation: pre-money vs. post-money and what it means for dilution
Pre-money valuation is the company's value before the new investment. Post-money valuation = pre-money + investment amount. Founder dilution from a round = investment amount / post-money valuation. A $2M investment at $8M pre-money creates a $10M post-money valuation and 20% dilution.
SAFEs (Simple Agreements for Future Equity) often use post-money caps, which means the valuation cap is the post-money valuation. A $10M post-money SAFE cap with a $2M investment implies an effective pre-money valuation of $8M and 20% dilution. This is a meaningful difference from a $10M pre-money SAFE cap, which would imply only 16.7% dilution on the same investment. Understand which you are signing.
Liquidation preferences: the most economically important clause
A liquidation preference determines how proceeds are distributed in an exit before common shareholders (founders) participate. A 1x non-participating preference means the investor can take back their investment first, then participate in remaining proceeds alongside common shareholders pro-rata. This is the market standard for Series A in the US and UK.
Participating preferred stock (double-dip) means the investor takes their 1x preference AND participates in remaining proceeds as if they had converted to common. This is founder-unfriendly and uncommon in the current market for seed and Series A. A participating preferred term should be negotiated hard.
Multiple liquidation preferences (2x, 3x) mean the investor takes 2x or 3x their investment before common shareholders receive anything. These were common in the 2000s and during downturns; they are unusual in a healthy venture market. If you see a multiple preference, understand the exit scenario math carefully before signing.
Board composition: control in practice
Board seats define control over major company decisions: hiring and firing the CEO, approving large expenditures, sale of the company, future fundraises. After a seed round, a common structure is 2 founders + 1 investor board seat + 2 independent seats (to be appointed later). After Series A, a common structure is 2 founders + 2 investors + 1 independent.
The independent director seat is often the swing vote on contentious decisions. Who nominates the independent director matters as much as who they are. A term sheet where the lead investor has the right to nominate the independent director effectively gives them board control if they ever vote with their partner seat.
Protective provisions: investors often have veto rights over certain major decisions regardless of board composition. Standard protective provisions include: raising new debt above a threshold, issuing new shares, selling the company, and changing the charter. These are reasonable. Non-standard provisions (veto on hiring above a salary threshold, veto on adding products or markets) should be pushed back.
Pro-rata rights and information rights
Pro-rata rights give investors the right (not obligation) to invest in future rounds at the same percentage they currently own. This prevents dilution for investors who want to maintain their ownership stake. Pro-rata rights are standard and generally founder-friendly too, because they ensure your existing investors can double down if things are going well.
Information rights: investors typically request quarterly financial statements, annual audited accounts (for larger investments), and cap table updates. These are standard and reasonable. Some term sheets include operational metrics reporting requirements (monthly reporting of ARR, churn, headcount) which create ongoing administrative work for early-stage companies. Negotiate the specifics of what you report and at what frequency.
Anti-dilution protection: broad-based vs. full ratchet
Anti-dilution protection adjusts the conversion price of preferred stock downward if you issue new shares at a lower valuation (a down round). Broad-based weighted average anti-dilution is market standard and calculates the adjustment based on the total capitalisation including the new shares. Full ratchet anti-dilution resets the conversion price to the new lower price entirely, which heavily penalises founders and common shareholders. Never accept full ratchet.
Carve-outs from anti-dilution: shares issued to employees under an option plan, shares issued in connection with strategic partnerships, and shares issued in connection with equipment financing are typically excluded from anti-dilution calculations. Review the carve-out list carefully as a narrow carve-out can trigger anti-dilution adjustments in situations where a broad carve-out would not.
Related: The Startup Fundraising Playbook: Complete Guide • All Articles • The Raise Ready Book
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