Term Sheets & Deal Structuring

How to read a term sheet, what its key clauses actually mean and protect against, and how deal structure shapes an outcome long before an exit.

The document that quietly decides most of the outcome

Lessons

A term sheet sets two things: who gets the money and who gets the say — Every clause in a term sheet affects either the economics - how proceeds are divided - or control - who can make or block decisions. Valuation is only one economic term among several. (10 min)
Run the waterfall at three exit values, and the preference type becomes obvious — A 1x non-participating preference returns the investment or the investor's share, whichever is higher. A participating preference returns the investment and then a share of the rest. The difference is largest at modest exits. (13 min)
A higher valuation with harsher terms can leave common holders worse off at every realistic exit — Run the numbers and a lower valuation with clean terms often beats a higher valuation with a large or participating preference, across the range of outcomes that are actually likely. (11 min)
Board seats, vetoes, drag-alongs and anti-dilution decide who holds power in a crisis — Control terms rarely matter when a company is thriving. They matter in down rounds, disputed sales and restructurings - exactly when founders and small investors most need to understand them. (12 min)
You will not set the price, but you can ask for the three things that matter — Small investors join rounds on terms the lead negotiated. What remains negotiable is usually information rights, pro-rata rights and a most favoured nation clause - and those are worth asking for every time. (10 min)
A side letter is where your specific rights live, and MFN is how you avoid being the worst-treated investor — Side letters grant individual investors rights outside the main documents. A most favoured nation clause entitles you to any better terms given to comparable investors in the same round. (10 min)

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