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 read · Level 4
I think most people read term sheets from the top, where the valuation is, and lose attention by the time they reach the clauses that decide what happens in a hard year. The valuation matters at the headline moment. Preferences, vetoes and drag-alongs matter at the moments when the company's future is actually being decided.
A term sheet is a short document setting out the main terms of an investment before full legal agreements are drafted. Most of it is not legally binding, apart from clauses such as confidentiality and exclusivity, but the final documents usually follow it closely.
Its clauses fall into two groups:
Economics Control Valuation and price per share Board composition Option pool Protective provisions (vetoes) Liquidation preference Drag-along and tag-along rights Participation Information rights Anti-dilution protection Founder vesting Pro-rata rights Consent requirements Dividends
Economic terms decide how money is divided in a sale, a down round or a wind-down. Control terms decide who can approve a sale, a new round, a new hire or a change in strategy.
The two are separate axes. An investor might accept a lower valuation in exchange for strong control rights, or a higher valuation with a larger liquidation preference. Comparing term sheets on valuation alone misses most of what differs between them.
Because deal structure shapes outcomes long before an exit. A clause that seems remote at signing - a preference, a veto, a drag-along - can decide what founders and earlier investors receive, and who controls the company in a crisis.
For an angel or small investor joining a round, understanding these terms explains why the lead investor negotiates as it does, and how the terms affect your own position.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two term sheets for the same company.
Term Offer A Offer B Pre-money valuation 30,000,000 36,000,000 Liquidation preference 1x non-participating 1.5x participating Board 2 founders, 1 investor 1 founder, 2 investors Protective provisions standard broad, including hiring above a salary level
Offer B has a higher valuation. It also gives investors more of the proceeds in most exits, a board majority, and veto over routine decisions. Offer A is lower on the headline number and better for founders and existing holders on nearly every other term.
Comparing term sheets by valuation alone, without examining the preferences, participation and control terms that often matter more.
Read the term sheet and label each term, so you can compare offers on both axes.
Compute proceeds for each class of holder at low, middle and high sale values.
List who can approve a sale, a new round and major hires under each offer.
Identify which clauses are binding now, such as exclusivity, and how long they last.
When a company you hold or are joining receives a term sheet, or when comparing offers.
Do not rely on a term sheet summary without seeing the final legal documents, which can add or change terms.
The U.S. National Venture Capital Association publishes model legal documents including a model term sheet, and several accelerators and law firms publish open templates. These are widely used as starting points and make it easier to see where a particular offer departs from common practice.
Compare any term sheet against a public model version; the departures are where negotiation and risk concentrate.
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