Before signing a financing term sheet, work through three questions: what will each holder own after closing, how will sale proceeds be divided, and who must approve future decisions? Also identify obligations that take effect before the financing closes.
Before you sign: a term-sheet checklist
- Identify binding obligations. Read the binding-effect language and governing law. Check confidentiality, exclusivity, expenses, and any commitment to negotiate. Calendar the exclusivity deadline, identify how it ends, and confirm whether expenses are capped and payable if the financing fails. See What's Binding and What's Not.
- Get the post-closing cap table. Show outstanding shares, SAFE and note conversions, accrued interest where applicable, warrants, and the option pool. Ask who bears a pool increase and compare ownership using the same fully diluted denominator. Model a lower-priced future round under the proposed anti-dilution terms.
- Model the payout. Compare preference multiples, participation, participation caps, seniority, dividends, and conversion rights at several sale prices. A 1× nonparticipating preference is a useful comparison point; it does not establish current market terms or fair economics. See Priced Equity Rounds and the example below.
- Identify decisions requiring investor consent. Test the proposed vetoes against the next financing, debt, budget changes, hiring, and a sale. Ask for appropriate thresholds and exceptions, identify which investors must consent, and establish when those rights end.
- Map board control. Check appointment and removal rights, vacancies, quorum, and voting thresholds. An independent director may help resolve a board vote but cannot override separate investor or stockholder approvals. Identify who selects the independent director and what happens if the seat stays vacant.
- Review founder vesting and closing conditions. Ask how prior service is credited, what stock remains subject to repurchase, and when acceleration applies. Confirm the financing amount, remaining diligence, approvals, and expected closing date before committing to exclusivity. See Founder Vesting Schedules.
Example: the same ownership percentage, different payouts
Assume one investor paid $2 million for preferred stock representing 20% of the company on an as-converted basis. The company is sold with $5 million available for shareholders. Ignore debt, expenses, dividends, other preferred stock, and taxes; assume the documents provide the rights described below.
- 1× nonparticipating preference: the investor chooses between its $2 million preference and the $1 million it would receive by converting to common. It takes $2 million, leaving $3 million for common holders.
- 1× uncapped participating preference: the investor receives $2 million first, then 20% of the remaining $3 million. It receives $2.6 million, leaving $2.4 million for common holders.
The ownership percentage is identical, but participation shifts $600,000 from common holders to the investor in this example. Model the proposed documents before treating valuation as the whole deal.
Choose your negotiation priorities
Put the few terms that materially affect your proceeds, control, or ability to close at the top of your response. Support an option-pool request with the hiring plan, a preference objection with a payout model, and a consent-right change with a concrete operating example.
Discuss your term sheet
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