A term sheet is usually two or three pages, non-binding on most of its terms, and describes itself as a summary. It is also where the real balance of control between a founder and an investor gets set, well before the far longer shareholders’ agreement and share subscription agreement are drafted. Founders who focus only on the valuation line tend to be surprised later by what else they agreed to.
Valuation is only half the number that matters
Pre-money valuation gets the headline, but the post-money figure, valuation plus the new investment, is what actually determines your percentage after the round closes. Founders regularly underestimate how much an unallocated employee option pool, if it is created or topped up before the investment rather than after, dilutes existing shareholders rather than the incoming investor. Where the option pool sits in the calculation is worth as much attention as the headline number.
Liquidation preference decides who gets paid first, not just how much
A liquidation preference gives the investor the right to get their money back, sometimes with a multiple on top, before any proceeds are shared with ordinary shareholders on a sale or wind-up. A straightforward 1x non-participating preference is standard and fair. A participating preference, where the investor takes their preference and then also shares in what is left, or a multiple above 1x, can mean a founder walks away with far less than the headline valuation would suggest, even in a genuinely successful exit.
Board seats and reserved matters are where control actually lives
A board seat is rarely just a seat. It usually comes attached to a list of reserved matters, decisions such as raising further capital, taking on debt, hiring or firing the CEO, or selling the company, that need investor consent regardless of how the founders vote as shareholders. Read this list as carefully as anything else in the document. It is frequently where more practical control sits than the headline equity split suggests.
Anti-dilution and vesting protect the investor, not you, by default
An anti-dilution clause protects the investor’s percentage if you later raise money at a lower valuation, usually at the founders’ expense. Founder vesting, where your own shares are earned over a period rather than fully owned immediately, protects the company and the investor if a co-founder leaves early, and is now close to standard practice, but it is still worth confirming what happens to unvested shares on a departure, and whether an acquisition accelerates vesting.
The exclusivity clause is often the only binding part
Most of a term sheet is explicitly non-binding, but the exclusivity or “no-shop” clause usually is, locking you out of talking to other investors for a set period while this deal is negotiated. If that period runs long and the deal then falls through, you have lost real time in your fundraising window for nothing. Negotiating a shorter exclusivity period is one of the few term sheet points founders can push back on with little cost to the investor.
