What a term sheet actually says

A liquidation preference guarantees investors get their money back before common shareholders see anything. A 1x non-participating preference — the market standard — means the investor chooses either their money back or their pro rata share of the proceeds, whichever is larger. That is a fair protection against a disappointing exit.

A participating preference is different: the investor takes their money back and then also shares in the remainder as if they had converted. In a modest exit this can consume most of the proceeds before common holders receive anything. Multiples above 1x compound the effect and should be treated as a serious concession, not a detail.

Anti-dilution protection adjusts an investor's conversion price if the company later sells shares at a lower valuation. Broad-based weighted average — the standard — makes a proportionate adjustment based on how much new stock was issued and at what price. It is a reasonable protection and rarely worth fighting.

Full ratchet is the aggressive version: the earlier investor's price resets all the way down to the new price regardless of how small the new round is. A tiny down round can then transfer a large slice of the company. If full ratchet appears in a term sheet, negotiate it out or cap it.

Term sheets almost always require an option pool of ten to twenty percent for future hires. The critical word is where it sits: a pool created pre-money comes entirely out of existing shareholders, meaning the founders. A post-money pool dilutes everyone including the new investor.

This is the most common place where a headline valuation is quietly reduced. A ten million pre-money with a twenty percent pre-money pool is economically closer to an eight million pre-money. Ask for the pool to be sized against an actual hiring plan for the next eighteen months rather than a round number.

Board composition determines who can fire the chief executive and approve a sale. A typical Series A board is two founders, one investor, and one mutually agreed independent director. Losing the independent seat to the investor side changes the company's governance far more than a point of valuation.

Protective provisions are the list of actions requiring investor consent: raising more money, selling the company, changing share classes, taking on debt, changing the board. Each one is reasonable in isolation, and the list collectively defines how much freedom the founders retain.

Fight for a 1x non-participating preference, a post-money or properly sized option pool, broad-based weighted average anti-dilution, and a balanced board. These four items account for the overwhelming majority of the difference between a founder-friendly and a founder-hostile deal.

Do not burn credibility on information rights, standard protective provisions, or legal fee caps. Signalling that you understand what matters and are relaxed about what does not is itself a negotiating advantage, because it tells the investor you have read documents like this before.

Signing without modelling the exit waterfall is the biggest one. Take the proposed terms, model a disappointing exit, a mediocre exit and a strong exit, and look at what the founders and the team actually receive in each. Terms that look academic at signing become concrete at exactly the moment it is too late to change them.

The other mistake is treating the exclusivity clause as harmless. Most term sheets bind you to stop talking to other investors for thirty to sixty days. If the deal falls apart in week six, the rest of the market has moved on and your runway has shortened. Keep the exclusivity window short.

Garage to IPO generates term sheets whose aggressiveness scales with your traction and the macro climate. Weak numbers in a tight market produce larger preferences and bigger pools; strong numbers in a boom produce clean terms and room to push back.

Negotiating is a real decision with real consequences: pushing hard can improve the terms or cost you the round entirely, and the preference stack you accumulate follows you all the way to the exit screen, where it decides what the founder ledger actually pays out.