A term sheet is a non-binding document outlining the key terms of an investment. Critical clauses: (1) Valuation (pre-money), (2) Liquidation preference (who gets paid first in exit), (3) Anti-dilution (protection against down rounds), (4) Board composition, (5) Vesting schedules, (6) Pro-rata rights (follow-on investment), (7) Drag-along/Tag-along.
Valuation gets all the attention, but liquidation preference and board control can matter more. A 2x participating preferred at a high valuation can be worse than 1x non-participating at a lower valuation.
Key Takeaways
- Valuation is important but NOT the only thing that matters.
- 1x non-participating liquidation preference is standard and fair.
- Never give up board control at Seed or Series A.
- Always have a startup lawyer review the term sheet.