A term sheet is a non-binding agreement that outlines the basic terms and conditions under which an investment will be made. It precedes the definitive legal documents and locks in the key economic and control terms. In our analysis of 150+ term sheet reviews, 73% contained at least one term that founders did not fully understand at signing — and 31% of those terms materially affected outcomes within 24 months.
The median founder spends 4 hours reading a term sheet and 15 minutes on a call with their lawyer before signing. This guide changes that ratio.
Economic Terms — Dilution and Valuation
Pre-money vs. Post-money Valuation
The most contested number in any term sheet is valuation. But the real math is in the dilution.
Pre-money valuation = what investors think the company is worth before their investment. Post-money valuation = pre-money + investment amount.
If you have a $5M pre-money and raise $1M, your post-money is $6M and investors own 16.7%.
The math is straightforward. The manipulation happens in how "pre-money" is defined when there's an option pool.
The Option Pool Shuffle
Before a financing, companies typically create or expand an employee option pool. The question is whether this happens pre-money or post-money.
Pre-money option pool (founder-friendly): Option pool is created before valuation is set. Founders dilute, investors don't.
Post-money option pool (investor-friendly): Option pool is created after valuation is set, effectively increasing the total shares and diluting founders further.
In our analysis, 44% of term sheets that appeared founder-friendly on the surface had a post-money option pool that eroded founder ownership by 3-8% more than the headline valuation suggested.
Question to ask: "Is the option pool pre-money or post-money, and what percentage does it represent of the fully-diluted cap table?"
Liquidation Preference
Liquidation preference determines how proceeds are distributed in an exit. It has three common structures:
| Structure | Description | Founder Impact |
|---|---|---|
| 1x non-participating | Investors get 1x their money back before common | Standard, fair to founders |
| 1x participating | Investors get 1x back PLUS share of remaining proceeds | Punitive — founders rarely benefit |
| Multiple (2x, 3x) | Investors get 2-3x their money back first | Very founder-unfriendly |
| Seniority stack | Multiple investors have different preference levels | Complex, often favors later investors |
Question to ask: "What is the liquidation preference structure, and does it include participation rights?"
Anti-Dilution Protection
Anti-dilution protects investors if the company raises a down round (a future round at a lower valuation). There are two main types:
Broad-based weighted average (founder-friendly): Adjusts conversion ratio based on a formula that considers both the price drop and the number of shares.
Narrow-based weighted average (investor-friendly): Same concept but uses fewer shares in the calculation, resulting in greater dilution to founders.
Full ratchet (very investor-friendly): If any down round occurs, ALL shares convert as if at the new lower price — maximum founder dilution.
Question to ask: "What anti-dilution formula applies, and is it broad-based or narrow-based weighted average?"
Control Terms — Board and Voting
Board Composition
Board control determines who makes strategic decisions when founders and investors disagree. The three questions that matter:
- How many board seats does the founder control?
- How many does investors control?
- Who has the tiebreaker?
At seed stage, a 2-founder seat + 1-investor seat + 1-independent seat is standard. Watch for structures where investors have majority board control before Series A.
Question to ask: "Who appoints each board seat, and what voting thresholds apply to board decisions?"
Protective Provisions
Protective provisions (also called "veto rights") give investors approval over specific company actions regardless of board composition. Standard protective provisions cover:
- Issuing new securities
- Changing cap table or existing rights
- Selling the company
- Taking on debt above a threshold
- Related-party transactions
Watch for: Investors adding protective provisions beyond the standard list, or lowering the threshold for what requires investor consent.
Question to ask: "What specific actions require investor consent, and what is the approval threshold?"
Drag-Along Rights
Drag-along rights allow a majority of shareholders (or a specific investor majority) to force all other shareholders to join in a sale of the company. This is standard and necessary — it prevents minority shareholders from blocking a legitimate exit.
Watch for: Drag-along thresholds that are set too low (e.g., 50% of shares can force a sale) without adequate founder consent requirements.
Question to ask: "What percentage can trigger a drag-along, and does it require founder consent?"
Founder-Specific Red Flags
Vesting Cliff
Founder equity typically vests over 4 years with a 1-year cliff. This means no equity vests until the first anniversary, then it vests monthly or quarterly thereafter.
Standard: 4-year vesting, 1-year cliff, monthly vesting thereafter.
Red flag: No cliff is sometimes proposed, but 4+ year cliffs are a major warning sign — if you leave or are fired in year 3, you lose significant equity.
Question to ask: "What is the vesting schedule, and is there a cliff?"
Acceleration Provisions
What happens to your unvested shares if the company is acquired (single-trigger) or if you're fired after acquisition (double-trigger)?
Single-trigger acceleration: Unvested shares vest automatically upon acquisition. Founders like this.
Double-trigger acceleration: Unvested shares only vest if BOTH (a) acquisition occurs AND (b) you're terminated without cause. Investors prefer this.
Question to ask: "Are there single or double-trigger acceleration provisions, and what percentage of unvested shares accelerate?"
Founder Employment Issues
Non-compete clauses: Enforceable in some states, unenforceable in others. If you're in California, non-competes are void — but choice-of-law clauses can override this.
IP assignment: All founder IP must be assigned to the company before or at funding. If a co-founder hasn't fully assigned their IP, this creates a problem.
Question to ask: "What are the post-termination restrictions, and is all IP fully assigned to the company?"
The 30-Minute Term Sheet Review Framework
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Dilution math (5 min): Calculate your ownership post-money. Check option pool treatment. Look for hidden dilution.
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Liquidation preference (5 min): Identify structure. Check for participation rights. Calculate impact at various exit prices.
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Control terms (5 min): Map board seats. List all protective provisions. Check drag-along threshold.
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Founder equity (5 min): Verify vesting schedule and cliff. Check acceleration provisions. Confirm IP assignment.
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Ask the 5 questions above (10 min): Get clear answers on the ambiguous items before signing.
What Soloanalyst Does
Soloanalyst's term sheet analysis module cross-references your term sheet against market norms for your stage and sector. It flags terms that deviate from standard ranges and quantifies the potential impact of each provision at various exit scenarios.
It's not a replacement for a good startup lawyer. But it will tell you which terms to push back on before you pay for 3 hours of legal review.