Term Sheet Clauses Founders Should Negotiate (and the Ones That Don't Matter Much)

A term sheet is short, usually two to six pages, and mostly non-binding. But it sets the shape of the final legal documents, and once you've signed it, reopening a point costs goodwill. The time to negotiate is before you sign.

This guide goes through the clauses that come up in seed and Series A term sheets, groups them by how much they matter, and suggests what a reasonable position looks like. It's not legal advice. You should always have an experienced startup lawyer review your term sheet. The aim here is to help you know which questions to ask.

Economic terms vs control terms

Term sheet clauses fall into two broad groups:

• Economic terms decide who gets how much money, especially in an exit.
• Control terms decide who makes decisions and who can block them.

Founders tend to focus on valuation, which is economic. Experienced founders spend at least as much attention on control terms, because those shape the next five to ten years of running the company.

The clauses that matter most

1. Valuation and what's included in it

The headline number matters, but so does the definition. Is it pre-money or post-money? What's included in the fully diluted share count? Do converting SAFEs and the new option pool sit inside the pre-money? Each of these can move effective dilution by several points. Our post-money valuation guide has the details.

2. Option pool size

Investors will ask for an unallocated pool, usually expressed as a percentage of post-money capitalisation, and usually created before their investment so it dilutes existing shareholders only. Push back with a realistic hiring plan. If your plan needs 8% to cover the next 18 to 24 months, there's little reason to create 15%.

3. Liquidation preference

This sets how exit proceeds are split. The standard at seed and Series A is a 1x non-participating preference: investors get the greater of their money back or what they'd receive by converting to common shares. Watch for:

• Multiples above 1x, such as 2x, which give investors more money back before anyone else is paid.
• Participating preferred, where investors get their money back and then also share in what's left. Sometimes called "double dipping".
• Seniority, where later investors get paid before earlier ones rather than alongside them.

A 1x non-participating, pari passu (equal ranking) preference is the clean, founder-friendly version. Read our liquidation preference guide for worked examples.

4. Board composition

Who sits on the board matters more than almost anything else in the long run, because the board can hire and fire the CEO and approve major decisions. A common early-stage structure is:

• Seed: two founders and one investor, or founders only with an investor observer.
• Series A: two founder or common seats, one investor seat, and sometimes one independent seat agreed by both sides.

Be wary of giving investors board control at an early stage. Also look at how independent directors are chosen. "Mutually agreed" is much better than "chosen by investors."

5. Protective provisions

These give preferred shareholders a veto over certain actions, such as selling the company, issuing new senior shares, changing the charter or taking on significant debt. Some protective provisions are standard and reasonable. The issues to watch are:

• a very long list that covers day-to-day decisions like budgets or hiring,
• a veto held by a single investor rather than a majority of preferred, and
• separate votes for each series, which can let a small investor block a deal.

6. Anti-dilution protection

If you later raise at a lower price (a down round), anti-dilution provisions adjust the investor's conversion price so they get more shares. The common, moderate version is broad-based weighted average. The harsh version is full ratchet, which reprices all of the investor's shares to the new lower price regardless of how much is raised. Accept weighted average. Push hard against full ratchet.

Clauses worth a conversation

7. Founder vesting

Investors usually want founder shares to vest, commonly over four years with credit for time already served. That's reasonable. Negotiate the credit for time served and the acceleration terms. "Double-trigger" acceleration, where vesting speeds up if the company is acquired and the founder is let go, is common and fair.

8. Pro rata rights

These let investors maintain their ownership by investing in future rounds. They're standard for significant investors. Be careful about giving them to every small cheque, because pro rata obligations can crowd out new investors later. A threshold such as "major investors" defined by a minimum investment amount is a common solution.

9. Information rights

Investors typically ask for annual financials, quarterly updates and budgets. That's fine. Make sure the obligations are proportionate. Audited statements every year can be expensive for a small company.

10. Drag-along

A drag-along lets a defined majority force all shareholders to approve a sale. It's useful because it stops small holders blocking an exit. Check who can trigger it. Ideally it requires approval from both the board and a majority of common shareholders as well as preferred, so investors can't force a sale the founders oppose at a low price.

Clauses that are usually standard

11. Right of first refusal and co-sale

These control what happens when founders want to sell their own shares. The company and investors get a chance to buy first, and investors can sell alongside founders. Normally fine as drafted.

12. No-shop or exclusivity

Many term sheets ask you to stop talking to other investors for 30 to 60 days while the deal closes. That's normal. Keep it short and make sure it ends automatically if the investor doesn't close.

A simple priority list

How to negotiate without souring the relationship

• Ask "why" before arguing. Sometimes a clause exists because of the fund's own rules, and there's a simple alternative that works for both sides.
• Bundle your asks. Raise all your points at once rather than one at a time. Drip-feeding requests looks like bad faith.
• Use standard documents. Templates from established sources (such as the NVCA forms in the US) are widely understood and reduce friction.
• Let your lawyer handle detail. Keep your own conversations with the partner focused on the big points and the relationship.
• Remember you'll work together. Winning every point and starting the relationship badly is a poor trade.

After you sign

The term sheet leads to the definitive documents: share purchase agreement, amended charter or articles, investor rights agreement, voting agreement and so on. Read the summary your lawyer prepares. Check that the final documents match what you agreed. It's surprisingly common for small changes to slip in during drafting.

Term sheet red flags at seed and Series A

Most term sheets from established investors are reasonable. A few terms, though, should make you slow down and ask questions. On their own they don't necessarily mean the investor is acting in bad faith, but they're unusual enough at early stages that you should understand exactly why they're there.

• Liquidation preference above 1x, or participating preferred, at seed or Series A.
• Full ratchet anti-dilution rather than weighted average.
• Investor control of the board at an early stage.
• Redemption rights that let investors demand their money back after a set number of years.
• Cumulative dividends that build up and are paid before common holders receive anything.
• Very long exclusivity, such as 90 days or more, especially without an automatic end date.
• Founder vesting that resets entirely with no credit for time already worked.
• Conditions to closing that are vague, such as "satisfactory completion of diligence" with no limits, combined with a long no-shop.

If you see several of these in one term sheet, consider whether this is the right partner, and get your lawyer to explain the likely impact in concrete exit scenarios.

Comparing two term sheets

When you're lucky enough to have more than one offer, compare them on a single page. List the valuation, round size, pool, preference, board, protective provisions and any unusual terms side by side, and then model founder proceeds at three exit values: a modest sale, a good outcome and a great one. The offer with the higher headline valuation isn't always the one that pays founders more, particularly in modest outcomes. Then weigh the numbers against what you learned about each partner from founder references.