What to actually look for in a term sheet
You got a term sheet. That's good news. But the negotiation is just starting, and most first-time founders focus on the wrong things.
Valuation gets all the attention. It shouldn't. Here's what actually matters.
Liquidation preferences
This determines who gets paid first when the company is sold. A 1x non-participating preference is standard and fair — the investor gets their money back or converts to equity, whichever is better. Anything beyond that (2x preferences, participating preferred) tilts the economics against you in most exit scenarios. If you're seeing those terms, push back or walk.
Board composition
Who controls the board controls the company. At seed, a common setup is two founder seats and one investor seat — or two founders, one investor, one independent. That works. What you want to avoid is giving up board control before Series A. It limits your ability to make decisions quickly, and it's very hard to undo later.
Anti-dilution provisions
These protect the investor if your next round is at a lower valuation (a "down round"). Broad-based weighted average is the standard and reasonable version. Full ratchet anti-dilution is aggressive — it means the investor's price gets reset entirely to the new lower price, which can crush founder ownership. Don't agree to full ratchet unless you have no other option.
Vesting and acceleration
Your own vesting schedule matters more than you think. If you're a founder with four-year vesting and a one-year cliff, make sure you negotiate single-trigger or double-trigger acceleration in case of acquisition. Without it, you could lose unvested shares in a sale even though you built the company.
Pro-rata rights
These give existing investors the right to invest in future rounds to maintain their ownership percentage. Pro-rata rights are normal and generally fine. But be aware of "super pro-rata" rights, which let investors take more than their share. These can crowd out new investors in later rounds.
The stuff nobody reads
Drag-along rights, information rights, ROFR clauses — founders tend to skip these because they sound procedural. They're not. Get a lawyer who's done startup deals before (not your uncle's corporate attorney) and have them walk through every clause. The fee is worth it.
Red flags to watch for
If you see any of these in a term sheet, slow down and get advice before signing:
Liquidation preference above 1x
Full ratchet anti-dilution
Investor majority on the board at seed stage
No single- or double-trigger acceleration for founders
Super pro-rata rights that could block future investors
Pressure to sign within 24–48 hours
One more thing
A term sheet isn't binding in most respects, but it sets expectations. Once you sign, renegotiating specific terms in the definitive documents gets uncomfortable fast. Take your time before signing. A good investor will give you a few days to review with your advisor and lawyer. If they're pressuring you to sign within hours, that tells you something.
