Venture Capital & Term Sheets
A compact, line-by-line guide to venture term sheet clauses and the valuation math behind them.
The big idea
Wilmerding walks through a standard venture term sheet clause by clause and explains how each one shifts money or control between founders and investors. The argument underneath is that the headline valuation is only one variable. Whether a number is pre- or post-money, how the option pool is created, what the liquidation preference looks like, and who controls the board together decide what founders actually own and receive. Founders who can do this math themselves negotiate on substance rather than on a single number.
Key takeaways
Post-money equals pre-money plus the new investment, and the investor's ownership equals the investment divided by post-money. A phrase like 'raising $4M at a $16M valuation' is ambiguous until you know which one is meant. That single word can move founder dilution by several points.
A 1x non-participating preference gives investors their money back or their ownership share, whichever is larger. Participating preferred takes its preference and then shares in the rest as well. Multiples above 1x stack on top. In large exits these terms barely matter; in modest exits they can decide most of the outcome.
Anti-dilution protects investors if a later round is priced lower. Broad-based weighted average adjusts their price partway, in proportion to how much stock is sold at the lower price. Full ratchet resets their entire position to the new low price regardless of how small the down round is, which can heavily dilute founders. Accept the first; resist the second.
Investors often require the option pool to be created or enlarged before their money comes in. That means the pool's dilution falls entirely on existing holders, effectively lowering the price founders receive. Always ask whether the pool sits in the pre-money or post-money, and size it to a real hiring plan.
Ownership percentage matters less than who can approve or block a financing, a sale or a budget. A founder can own a majority of shares and still lose control if investors hold most board seats or have broad protective provisions requiring their consent. Read the board and veto sections as carefully as the price, and map exactly which decisions will need investor approval.
A typical schedule vests over four years with a one-year cliff, and investors often apply it to founder shares too. Without vesting, a cofounder who leaves early keeps everything. With monthly vesting but no cliff, they keep the fraction earned. With a cliff, leaving before the first anniversary means no vested shares.
Pro-rata rights let an investor buy enough of each future round to keep their ownership percentage. That protects the investor, not the founders, who continue to dilute in every round. It also reserves part of each future round for existing investors, which can limit room for new leads. Model it before you grant it broadly.
The framework
| Term | Founder-friendly | Watch for |
|---|---|---|
| Valuation | Stated as pre-money with pool size defined | Ambiguous pre/post wording |
| Liquidation preference | 1x non-participating | Participation or multiples above 1x |
| Anti-dilution | Broad-based weighted average | Full ratchet |
| Option pool | Sized to hiring plan | Large pool carved from pre-money |
| Board and vetoes | Balanced board, short veto list | Investor board majority, broad consents |
Apply it this week
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This page is an original summary and commentary prepared by XRAYCLOUD.AI with AI assistance. It is not affiliated with or endorsed by the author or publisher, and it is no substitute for the book — read it for the full argument.