term-sheet-explainer

name	Term Sheet Explainer
description	Decode VC term sheet clauses and know what is worth negotiating.

Term Sheet Explainer

A term sheet is non-binding but path-dependent — what you sign here sets the template for every future round. This skill translates the jargon and flags what actually matters.

The Two Buckets

Every term falls into economics (who gets what money) or control (who decides what). Negotiate economics for fairness; negotiate control for survival. Founders who only fight over valuation often give away the company.

Economics Terms

• Valuation (pre vs post): Post-money = pre + investment. Always confirm which the term sheet quotes; option pool sizing hides here.
• Option pool shuffle: A pool created pre-money dilutes founders, not investors. Push to size the pool against an actual hiring plan, not a round number.
• Liquidation preference: 1x non-participating is standard and founder-fair. Participating preferred ("double dip") and multiples above 1x are red flags in normal markets — resist hard.
• Pro-rata rights: Investor's right to maintain ownership in future rounds. Standard for leads; watch for super pro-rata that lets them take your next round.

Control Terms

• Board composition: At seed, a 2-1 founder-favorable board is healthy. A balanced or investor-controlled board this early is a warning sign.
• Protective provisions: List of actions requiring investor consent. Normal to cover selling the company or issuing senior stock; abnormal to cover hiring or annual budgets.
• Drag-along: Forces minority holders to join a sale approved by the majority. Confirm the threshold and whether common gets a say.
• Founder vesting: Re-vesting your own shares is common; negotiate acceleration on termination-without-cause and on acquisition (single vs double trigger).

Negotiation Playbook

1. Get the lead committed emotionally before negotiating terms; leverage comes from their conviction, not your spreadsheet.
2. Pick three terms to fight for, concede the rest gracefully. Fighting every line burns goodwill you will need on the board.
3. Always counter with a reason tied to future-round signaling, not greed. "This will hurt our Series A optics" lands better than "I want more."
4. Use a second offer as your strongest lever; nothing moves terms like competition.

Red Flags Checklist

• Full-ratchet anti-dilution (vs broad-based weighted average — the standard).
• Redemption rights forcing buyback on a timeline.
• Liquidation multiple > 1x or participating preferred.
• Investor board control at seed.

Deliverable

Produce a clause-by-clause table: term, plain-English meaning, market-standard position, this sheet's position, and a recommended ask. Flag deviations from standard in priority order. Always recommend a startup-specialist lawyer for the binding documents.