Venture Capital & Term Sheets
Be Smarter Than Your Lawyer and Venture Capitalist
The term sheet, clause by clause, from two investors who have negotiated hundreds of them, so you know which terms actually move money and control.
The big idea
A venture term sheet looks like dozens of equally weighted clauses, but almost all of them reduce to two questions: who gets paid what when the company is sold (economics) and who gets to decide (control). Feld and Mendelson walk through each standard term, explain what investors want and why, and show founders where the market norm sits. That way you can negotiate the handful of terms that matter instead of spending goodwill on the ones that don't.
Key takeaways
Sort each clause into one of two buckets. Economics terms decide how proceeds are split: price, liquidation preference, option pool, anti-dilution, vesting. Control terms decide who can approve or block decisions: board composition, protective provisions, drag-along rights, conversion. If a clause touches neither, it is rarely worth a fight. The sorting tells you where to spend negotiating capital.
Pre-money valuation is only half of price. The size of the employee option pool, and whether it is created before or after the investment, changes what founders really own. A generous valuation paired with a large pre-money pool can leave you worse off than a lower valuation with a right-sized pool. Model the fully diluted cap table, not the press-release number.
The preference sets how much investors get back before common shareholders see anything. A 1x non-participating preference returns the investment or lets the investor convert to common, whichever pays more. Participating preferred takes its money back and then also shares in the rest. Multiples above 1x stack on top. In large exits these terms barely matter; in the more common modest exits, they decide everything.
Anti-dilution protects investors if a later round is priced lower. Broad-based weighted average adjusts their conversion price modestly, based on how much stock is sold at the lower price. Full ratchet resets their price all the way to the new low, no matter how small the down round. Weighted average is market standard; full ratchet is a sign of a difficult investor or a desperate situation.
Early boards are typically small, often two founders and one investor, or two and two with an independent. Who appoints the independent seat matters as much as the seat count. Protective provisions give preferred holders vetoes over specific actions, such as selling the company or raising new money, regardless of board makeup. Read both together to see who can really stop you.
Early money often comes as a convertible note or SAFE that converts in the next priced round. The valuation cap and discount set the effective price, and stacking several instruments can dilute founders more than expected. Notes add interest and a maturity date; SAFEs do not. Track every instrument on one cap table and model conversion before you raise more.
VCs manage money for limited partners, earn a management fee and a share of profits called carry, and work within a fund life of about ten years. A partner's incentives depend on fund size, how much is left to invest, and reserves held for follow-on rounds. Asking about these is normal and tells you how the firm will behave in your next round or a hard year.
The framework
| Term | Bucket | Founder-friendly norm |
|---|---|---|
| Pre-money valuation and option pool | Economics | Pool sized to an actual hiring plan |
| Liquidation preference | Economics | 1x non-participating |
| Anti-dilution | Economics | Broad-based weighted average |
| Founder vesting | Economics | 4 years with credit for time served |
| Board composition | Control | Founders keep a majority or neutral independent |
| Protective provisions | Control | Short, standard list of vetoes |
Apply it this week
Read next
An investor's-eye view of how venture funds work, so you can read a term sheet and pick partners with open eyes.
A compact, line-by-line guide to venture term sheet clauses and the valuation math behind them.
Tactical advice from the founders of Venture Hacks and AngelList on creating leverage and momentum in a fundraise.
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.