The Angel Investor's Guide to Deal Terms

Understanding What You're Actually Signing

Most angel investors focus entirely on valuation and ignore the terms that matter just as much. A good deal with bad terms can become a bad deal. Here's what every angel investor needs to understand.

The Two Categories of Terms

Pricing Terms (What You Pay)

Pricing terms determine how much equity you get for your money:

• Pre-money valuation - What the company is worth before your investment
• Post-money valuation - Pre-money plus your investment
• Price per share - The actual math

Post-money valuation = Pre-money + Investment

Price per share = Pre-money / Fully-diluted shares

Your ownership % = Your shares / Post-money shares

Non-Pricing Terms (What You Get)

Non-pricing terms determine your rights, protections, and future outcomes. These are often more important than valuation.

The Key Terms Every Angel Must Understand

1. Liquidation Preference

What it is: In an acquisition, who gets paid first and how much.

The ladder:

1. Senior debt (bank loans, etc.)
2. Preferred stock (investors)
3. Common stock (founders, employees)

The multiple:

• 1x non-participating (standard, founder-friendly)
• 1x participating (unusual)
• 2x non-participating (aggressive)
• 2x participating (very aggressive)

Non-participating vs participating:

• Non-participating: You get your preference OR your share of the proceeds, whichever is higher
• Participating: You get your preference AND share in the remaining proceeds

Example: $1M investment, company sold for $5M

Scenario A: 1x non-participating
- You get $1M (preference)
- Remaining $4M goes to common
- You get nothing more

Scenario B: 1x participating
- You get $1M (preference)
- You also get your % of $4M (your % × $4M)
- Total could be $2M+

Scenario C: 2x participating
- You get $2M first
- Then share in remaining $3M
- Total could be $3M+

What to push for: 1x non-participating

2. Anti-Dilution Protection

What it is: Protection if the company raises money at a lower valuation (down round).

The spectrum:

The weighted average formula:

New price = (Old price × Old shares + New price × New shares) / (Old shares + New shares)

Broad-based vs narrow-based:

• Broad-based: Uses ALL shares (including preferred) in calculation
• Narrow-based: Uses only common shares

Broad-based gives better protection.

What to push for: Broad-based weighted average (and be suspicious of anything else)

3. Pro-Rata Rights

What it is: Your right to invest in future rounds to maintain your ownership percentage.

Standard: You can invest pro-rata (your % stays the same)

Super pro-rata: You can invest MORE than your % to increase your ownership

Example:

• You own 10% of a company
• Company raises a new round
• With standard pro-rata: You can invest 10% of the new round
• With super pro-rata: You can invest 20-30% of the new round

What to push for: Standard pro-rata (you can cap at 2x your original % to avoid excessive dilution of other shareholders)

4. Board Composition

What it is: Who controls board decisions.

Standard structure:

• 2 founder seats
• 1 investor seat (for lead investor)
• 2 independent seats (neutral)

What to watch for:

• Investors demanding 2+ board seats
• Veto rights on decisions that should be management's job
• Board seats that "rotate" but always give investors majority

What to push for: Founder majority or tied board with independent casting vote

5. Information Rights

What it is: What financial and operational information you receive.

Standard: Monthly or quarterly financial reports, annual budget, significant events

What to push for:

• Monthly financial statements (not just annual)
• 30-day notice of material events
• Right to audit books annually (reasonable expense)

Red flags:

• Annual-only reporting (too slow)
• "Management discretion" on what to share
• No notification of legal proceedings

6. Termination / Exit Provisions

What it is: When and how the investment ends.

Typical triggers:

• Acquisition (good exit)
• IPO (great exit)
• Dissolution (bad exit)
• Timeout (no exit by year 7-10)

Key questions:

• Does your preferred stock convert to common in acquisition?
• Are there "drag-along" rights that force minority investors to sell?
• What happens if company fails - do you get anything?

The Terms That Should Make You Walk Away

Hard No's

1. Full ratchet anti-dilution - This is predatory. If a down round happens, your shares get repriced to the new low price. Founders who accept this don't understand what they're signing.

2. 2x+ participating liquidation preference - In a modest exit, investors with this preference get paid twice while founders get nothing.

3. Investor-majority board - If investors control the board, they can fire the founder, sell the company on unfavorable terms, or make other decisions against founder interests.

4. Super pro-rata without cap - Allows investors to take over the cap table in future rounds.

5. Personal guarantees - Some early-stage deals ask founders for personal guarantees on investor money. Never accept this as an angel.

Proceed With Caution

• 1x participating preference - Unusual but sometimes acceptable
• Narrow-based weighted average - Not ideal but manageable
• High option pool pre-money -稀释es founders but is common
• Drag-along without founder consent - Standard but negotiate for mutual consent

Pricing vs Terms: The Real Trade-off

Example A: Great Terms, High Valuation

• Valuation: $8M (high for stage)
• Terms: 1x non-participating, broad-based WA, standard pro-rata
• Verdict: Acceptable. Good terms mitigate high valuation risk.

Example B: Bad Terms, Low Valuation

• Valuation: $4M (attractive)
• Terms: 2x participating, full ratchet, super pro-rata
• Verdict: Walk away. Bad terms on a good valuation often equals bad outcome.

Example C: Bad Terms, High Valuation

• Valuation: $10M (very high)
• Terms: 1x non-participating but full ratchet
• Verdict: Negotiate. Push to change full ratchet to broad-based WA.

The Founder-Friendly Term Sheet Checklist

Use this when evaluating any term sheet:

• 1x non-participating liquidation preference
• Broad-based weighted average anti-dilution
• Standard pro-rata (capped at 2x original %)
• Founder majority or tied board
• Monthly information rights
• 30-day notice of material events
• Mutual drag-along rights
• No personal guarantees
• No full ratchet
• No super pro-rata without cap

Understanding the Cap Table

Option Pool

The option pool is shares reserved for future employees. Key questions:

1. How big is the pool? (15-20% is common for early stage)
2. Is the pool pre-money or post-money? (Pre-money = more dilution to founders)
3. What's the employee option strike price? (Lower is better for employees)

Calculation Example

Pre-investment cap table:
- Founders: 4M shares (80%)
- Option pool: 1M shares (20%)
Total: 5M shares

Investment: $1M at $5M pre-money

Post-money valuation: $6M
Price per share: $5M / 5M = $1.00
Investor shares: $1M / $1.00 = 1M shares

Post-investment cap table:
- Founders: 4M shares (66.7%)
- Option pool: 1M shares (16.7%)
- Investor: 1M shares (16.7%)
Total: 6M shares

Common Founder-Friendly Variations

For seed rounds:

• SAFE notes (no terms to negotiate, converts at next priced round)
• Convertible notes (some terms but simpler than priced rounds)

When you have leverage:

• Post-money SAFE (more transparent than pre-money)
• No anti-dilution (founder-friendly, hard to get)
• Founding investor board seat (more control)

Key Takeaways

1. Terms matter as much as valuation - A great valuation with bad terms is often a bad deal.
2. Know your non-negotiables - 1x non-participating and broad-based WA should be standard.
3. Get a lawyer - Startup financing documents are complex. Pay for expert review.
4. The cap table tells the full story - Look at option pool size and source.
5. Walk away from predatory terms - Full ratchet and 2x participating should be deal-breakers.

Tools

• Term Sheet Analyzer
• Cap Table Calculator
• SAFE Calculator

This guide is part of SoloAnalyst's due diligence framework. For automated deal analysis, try SoloAnalyst.