Term sheet
The term sheet, clause by clause
A term sheet is short, but a handful of its clauses decide how a sale is split and who controls the company. Here is what each clause does, with the usual market position and the variations to watch.
A seed or Series A term sheet in one table
The usual early-stage position for each clause, as reflected in the NVCA model documents and common U.S. practice, and the variants that shift value or control. "Usual" is not "required": everything is negotiable, and your lawyer should read the actual wording.
| Clause | What it does | Common early-stage position | Variants to watch |
|---|---|---|---|
| Valuation | Sets the price per share | Pre-money stated, fully diluted including pool and converting SAFEs/notes | Which of the pool, SAFEs and notes sit in the pre-money (each lowers the price) or the post-money |
| Option pool | Reserves shares for hires | Topped up in the pre-money to a target % of post-money | A pool larger than the hiring plan needs |
| Liquidation preference | Who is paid first in a sale | 1x, non-participating | Participation, multiples above 1x, seniority over earlier series |
| Dividends | Payments on preferred | Non-cumulative, when and if declared | Cumulative dividends that add to the preference each year |
| Anti-dilution | Adjusts conversion price in a down round | Broad-based weighted average | Narrow-based; full ratchet |
| Conversion | Preferred into common | Optional at any time; automatic on IPO or majority vote of preferred | High IPO thresholds that give investors a veto over going public |
| Board | Who governs | Seed: founders, maybe one investor. Series A: 2 common, 1 investor (± 1 independent) | Investor majority early; independents chosen by investors alone |
| Protective provisions | Investor vetoes | Standard list (charter changes, new senior stock, sale, debt above a threshold) | Operational vetoes; per-series vetoes; low supermajority thresholds |
| Pro rata rights | Right to buy into later rounds | For major investors, to maintain ownership | Super pro rata; rights for every small holder |
| Information rights | Financial reporting | Annual and quarterly statements, annual budget, for major investors | Monthly reporting; audits at seed |
| Founder vesting | Founders earn their stock | Four years, one-year cliff, credit for time served, double-trigger acceleration | Restarting from zero; no acceleration |
| Drag-along | Forces holders to join an approved sale | Board + majority of preferred (+ sometimes common) | Investor-only trigger; no price floor |
| ROFR and co-sale | Restrict founder share sales | Company then investors may buy; investors may sell alongside | Broad restrictions on all secondary sales |
| Redemption | Investors can demand repayment | None | Redemption after a fixed period |
| No-shop | Exclusivity while documents are drafted | Binding, a few weeks | Long periods; no termination if the investor stalls |
| Expenses | Who pays investors' lawyers | Company pays, capped | No cap |
Term sheet Liquidation preference
The clause that decides who is paid first when the company is sold. At modest exit values it matters more than the valuation.
Term sheet Anti-dilution protection
If a later round is priced lower, anti-dilution protection gives earlier preferred investors more shares on conversion. The formula decides how much more.
Term sheet The option pool and the shuffle
When a new option pool is counted in the pre-money valuation, its cost falls entirely on existing holders. That can be worth more than a bump in the headline valuation.
Term sheet Pro rata rights
A right for an existing investor to buy into the next round to keep their percentage. Useful to investors, and a real cost to founders if handed out freely.
Term sheet Board seats and protective provisions
Economics decide how money is split; control terms decide who makes decisions on the way there. These clauses outlast any single round.
Term sheet Founder vesting and 83(b)
Investors want founders' shares to be earned over time. Vesting protects co-founders from each other too, and in the U.S. it comes with a 30-day tax deadline.