Educational only — not investment, legal or tax advice.

Most venture term sheets are short, and most of the economic terms in them are non-binding until the final documents are signed. Even so, almost everything you will live with for the next five years is decided at this stage. Changing a term after you have signed the term sheet is much harder than getting it right before.

Here are the nine clauses to read first, in order of how often they surprise founders.

Economics: what you keep

1. Valuation and amount. The pre-money valuation and the amount raised set the price per share. Always confirm whether the valuation is pre- or post-money, and what is counted in the share total.

2. Option pool. If the term sheet requires a new or larger pool before the investment, it reduces your effective valuation. See the option pool shuffle.

3. Liquidation preference. Who gets paid first at a sale, and how much. 1x non-participating is the founder-friendly benchmark. See liquidation preferences, explained.

4. Anti-dilution. What happens to the investor’s stake if a later round is priced lower. Broad-based weighted average is the norm; full ratchet is a red flag. See anti-dilution and down rounds.

Control: who decides

5. Board composition. How many seats, who appoints them, and whether there is an independent director. A seed-stage board of two founders and one investor is very different from one investor, one founder and one independent.

6. Protective provisions. A list of decisions that need the preferred investors’ approval, such as selling the company, raising new money, changing share rights or taking on debt. Standard lists are reasonable. Long lists that reach into everyday operations (budgets, hiring, contracts) are not.

People: what happens to founders

7. Founder vesting. Investors often ask founders to put existing shares back on a vesting schedule, commonly four years. Negotiate credit for time already served, and check what happens if you are fired without cause or the company is sold (acceleration).

Exit and future rounds

8. Drag-along rights. If a set majority approves a sale, other shareholders must go along with it. This is normal, but the thresholds matter: who has to agree before the company can be sold, and can one investor block it?

9. Pro rata rights. The right for investors to buy into future rounds to maintain their stake. Normal for major investors; worth limiting for small ones. See pro rata rights.

Also read: the binding clauses

A few clauses usually are binding the moment you sign: confidentiality and exclusivity (often called “no-shop”), which stops you talking to other investors for a set period. Keep the no-shop short, commonly 30 to 45 days, so a stalled deal doesn’t leave you stranded.

From the investor’s side of the table

I have led term sheet negotiations on rounds from €3M to $18M. The founders who came out best rarely fought every line. They knew which two or three clauses mattered most for their situation, traded on the rest, and arrived with a lawyer who had seen many of these documents.

The short version

Price is one line. Control, preferences and the option pool are the rest of the deal. Read all nine before you celebrate the number.

Sources

• NVCA model legal documents
• Cooley GO glossary: Board of directors
• Cooley GO glossary: Vesting
• Cooley GO glossary: Drag-along rights

Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.