Term Sheet Decoder.

A term sheet is a non-binding document that outlines the key economic and control terms of a proposed venture investment. It precedes the long-form definitive agreements (Stock Purchase Agreement, Voting Agreement, Investor Rights Agreement) and serves as the basis for those documents.

Term sheets are typically 2 to 5 pages and cover valuation, liquidation preference, anti-dilution, board composition, pro rata rights, option pool refresh, vesting, no-shop, and protective provisions.

1x non-participating liquidation preference means investors get back their original investment first in a liquidation event, and then they choose between (a) keeping that 1x preference or (b) converting to common stock and sharing pro rata.

They pick whichever is better for them. This is the founder-friendly market standard at seed and Series A.

1x participating gives investors their 1x back and a pro rata share of remaining proceeds. This is "double dipping" and is more aggressive. Now uncommon at early stages but appears in down rounds and structured deals.

Anti-dilution protects investors against future down rounds (where the company raises at a lower valuation). It adjusts their conversion price to give them more shares.

Broad-based weighted average uses a formula with all outstanding equity (common, preferred, options, warrants) in the denominator. This dilutes the adjustment and is the market-standard, founder-acceptable form at seed and Series A.

Narrow-based weighted average uses a smaller denominator (excluding options). Slightly more investor-favorable.

Full ratchet adjusts the conversion price all the way down to the new round price. Very aggressive. Rare in modern venture deals outside distressed situations.

Series A investors typically require a post-money option pool of 10 to 15 percent. Most term sheets ask for this pool to be expanded pre-money, meaning founders absorb the dilution.

The standard ask is 10 to 12 percent. Above 15 percent is aggressive unless justified by a specific hiring plan. The right way to push back is with a credible hiring budget for the next 12 to 18 months showing how the pool actually gets used. This is a place where founders consistently leave 1 to 3 percent of ownership on the table by not pushing back with data.

Pro rata rights let an investor maintain their ownership percentage by participating in future rounds.

At seed and Series A, granting pro rata to your lead investor is standard and reasonable. Granting it to every investor on the cap table (sometimes called "super pro rata" or universal pro rata) can create signaling and execution problems at the next round, especially if smaller investors do not follow on.

The best practice is to concentrate pro rata with your top one to three investors and limit it to "major investors" defined by check size.

A no-shop clause (also called an exclusivity period) prevents the company from soliciting or negotiating with other investors during a specified period after signing the term sheet.

Typical durations are 30 to 45 days. Longer than 60 days is investor-favorable and worth pushing back on. It limits your negotiating leverage if diligence drags. A 45-day no-shop with the option to extend by mutual agreement is a clean middle ground.

The market-standard Series A board is 5 seats: 2 founder/common, 2 investor/preferred, 1 independent director jointly approved.

This "2-2-1" structure preserves founder influence while giving investors meaningful representation. A 3-2 investor-majority board at Series A is aggressive and rare unless the round is unusually large or the company is in distress.

Seed rounds often have a smaller board (3 seats: 2 founder, 1 investor) or no formal board, with board observer rights instead.

No. This tool is educational and helps founders understand what is being asked of them at a high level. Specific term sheets are negotiated by experienced startup lawyers (Cooley, Wilson Sonsini, Gunderson, Fenwick, Orrick, Latham, etc.) who know each fund's tendencies and the market for your specific situation.

Use this tool to walk into legal review more informed and to know what to ask about. Do not use it to negotiate without counsel.