A term sheet is mostly about control and downside
Valuation gets the attention, but the clauses below quietly decide who controls the company and who gets paid first if things go sideways.
The clauses that matter most
- Liquidation preference: aim for 1x non-participating; avoid participating “double dip”.
- Anti-dilution: prefer broad-based weighted average over full ratchet.
- ESOP pool: note whether it is created pre-money (dilutes you) or post-money.
- Board composition: who controls votes after this round?
- Pro-rata rights: investors’ right to maintain ownership in future rounds.
- Drag-along / tag-along: rules for forced and protected exits.
- Founder vesting: typically 4 years with a 1-year cliff.
- Information & inspection rights.
- Right of first refusal (ROFR) on transfers.
- Protective provisions / reserved matters.
- Conversion terms.
- Exclusivity / no-shop period.
Negotiate terms, not just valuation. A high valuation with a 2x participating preference can be worse than a lower one with clean terms.
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