Economics
Pre-money valuation
The number that gets the headlines. Pre-money + investment = post-money. Investor's % = investment / post-money. Always do this math yourself — don't rely on the term sheet's stated %.
Liquidation preference
Order of payout when the company sells. 1× non-participating is standard at seed: the investor gets their money back first, then either takes the preference or converts to common — never both. 2× participating means the investor gets 2× their money back AND their pro-rata of the rest. Avoid at seed; expect heavy push at Series B+.
Anti-dilution
Broad-based weighted average is fair and standard. Full ratchet means if you raise the next round at a lower price, the investor's price gets reset to that price — incredibly punitive on a down round. Reject full ratchet at any stage.
Pro-rata rights
The investor's right to buy enough of your next round to maintain their %. Standard for institutional investors. Cap pro-rata to investors with >5% to avoid 14 angels each demanding allocation in your next round.
ESOP top-up
Investors will require a refreshed ESOP pool, sized so it dilutes founders pre-money, not the new money. 10–15% pool at seed, 15–20% by Series A. Negotiate the size — most term sheets quote a number that's 2–3% above what's needed.
Control
Board composition
At seed, a 3-person board is common: 1 founder, 1 lead investor, 1 independent (mutually agreed). At Series A, expect 5: 2 founders, 2 investors, 1 independent. Lock down the independent's nomination process — "mutually agreed" beats "investor's choice".
Protective provisions
Investor consent required for: sale of company, fundraise, budget approval, executive hiring, debt above $X, related-party transactions. Standard. Push back on: dividend payment veto (irrelevant at this stage), product-roadmap consent (none of their business), individual hire vetoes below VP level.
Drag-along
Forces minority shareholders to sell if a majority approves. Standard. Negotiate the trigger — "majority of preferred + majority of common" is fair; "investor majority alone" gives away too much.
Founder vesting
4 years, 1-year cliff, restarted at the round. Yes, even on shares you already own. Investors want commitment. Push for credit for time already served — typically 1 year of immediate vesting at signing. Without this, you've effectively reset to year zero.
No-shop / exclusivity
You agree not to talk to other investors for 30–60 days. Acceptable post-term-sheet. Avoid pre-term-sheet exclusivity — it's a stalling tactic.
The four-clause showdown
If you can negotiate only four things, in order:
- Liquidation preference — must be 1× non-participating at seed.
- ESOP size — every 5% you save is a 5% founder dilution avoided.
- Vesting credit — 1+ year credit at signing is your sanity insurance.
- Anti-dilution — broad-based weighted average, never full ratchet.
Related guides
- Negotiating the close → Once you have a term sheet, what's next.
- Co-founder agreements → The agreement before the agreement.
- The data room → What the term sheet expects to find.