Term Sheet Decoded
A plain-language walkthrough of valuation, liquidation preferences, anti-dilution, board composition, and protective provisions - and the second-order consequences of each.
Valuation is the headline; structure is the story
Founders often optimize for the number on the front page. Sophisticated founders read the structure behind it. A high valuation with participating preferred and a 2x liquidation preference is a lower valuation than a lower valuation with clean terms.
“A high valuation with unfriendly structure is a lower valuation.”
Liquidation preferences
The preference determines who is paid first and how much. Non-participating 1x is the market standard for a reason. Participating preferred and multiple preferences shift the outcome to investors in every scenario except a very large exit.
Anti-dilution
Weighted-average is standard. Full ratchet is punitive. In a down round, the difference is not academic - it is the founder's remaining ownership.
Board composition and protective provisions
Who sits on the board, and what decisions require their consent, quietly determines how the company is actually run. Read these clauses as if the relationship will one day be strained - because at some point, it will be.
The clauses no one negotiates
Information rights, pro-rata, ROFR, drag-along, and vesting acceleration are the clauses that determine what happens in the moments that matter most. Do not accept them by default.
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