Term sheets: reading the terms that matter before the money

The four clauses that carry 90 percent of the value

Price per share and pre-money valuation — the headline everyone reads. Liquidation preference — who gets paid first when the company sells, and whether they get their money back plus a multiple before common sees a cent. Board composition — who actually governs. Pro-rata rights — who can keep buying in future rounds.

The rest of the document is mostly standard. Those four are where the economics and control of the next seven years are decided.

Preferences: 1x clean, anything else negotiate

A 1x non-participating preference means investors either take their money back or convert to common — clean and normal. Participating preferred means they take their money back AND their share of the remainder ('double dip'). Multiples above 1x (2x, 3x) mean they take two or three times their money off the top.

Participating and multiple preferences are how a company can exit for $100 million and still leave founders with little. Model your own exit waterfall before signing anything you have not modelled.

• Price: pre-money vs post-money — clarify in writing
• Preference: 1x non-participating is standard
• Board: founders should hold the swing vote
• Pro-rata: confirm your own right to follow on

What actually binds

Exclusivity clauses bind — you cannot shop the deal while they 'finalize.' Confidentiality binds. Everything economic is non-binding until the definitive agreements, which is precisely why the term sheet stage is where you negotiate: afterwards you are merely confirming paperwork.