# Term Sheet Decoder

Glossary + founder-friendly defaults + pushback strategies for every clause in a standard venture term sheet. **Not legal advice.** Always engage venture / securities counsel before responding.

## The Three Clauses That Matter Most

In any term sheet review, focus disproportionately on these three. They drive ~80% of the founder economics impact.

### 1. Liquidation Preference

**What it is:** Investors get their investment back (the "preference") before founders see anything in an exit.

**The dimensions:**

- **Multiple:** 1x (standard) means $1 back per $1 invested. 2x means $2 back. Higher = more hostile.
- **Participating vs Non-participating:**
  - **Non-participating (founder-friendly):** Investor chooses preference OR convert to common at exit. Most exits hit the conversion threshold, so preference is effectively just downside protection.
  - **Participating ("double-dip"):** Investor gets preference back AND a pro-rata share of remaining proceeds as if converted. Significantly increases investor take in mid-range exits.
- **Cap:** Caps the total return at, say, 2x or 3x of investment for participating preferences. Limits the double-dip.

**Standard (Series A/B):** 1x non-participating.

**Hostile flavors:**
- 1x participating uncapped (significant founder dilution at exit)
- 2x preference (only acceptable in distressed rounds)
- Multi-stack preferences (Series A + Series B both get their preferences before any common)

**Pushback:** "Our standard is 1x non-participating. Participating preferences create misalignment with management at exit."

### 2. Option Pool — Pre-Money vs Post-Money

**The "option pool shuffle":** Investors typically require an unallocated option pool (10-20% of post-money) to be created **before** the new investment. If this comes out of pre-money, founders are diluted; if post-money, all shareholders dilute proportionally.

**Example math (Series A):**

| Scenario | Pre-Money | Pool Size | Effective Pre-Money for Founders |
|---|---|---|---|
| $30M pre, 10% pool pre-money | $30M | 10% of post | ~$26M (10% comes from founders) |
| $30M pre, 10% pool post-money | $30M | 10% of post | $30M (pool spread across all) |

**Standard:** 10-15% pool, often pre-money at Series A. Founder-friendly: smaller pool or post-money.

**Pushback:** "We've modeled our hiring plan and 8% supports the next 18 months. Let's right-size to actual need, not standard percentage." Or: "Pool top-up should come out of post-money so the new investor shares the dilution."

### 3. Anti-Dilution

**What it is:** Protection for investors against future down rounds. If a later round prices below the current, the current investor's price is adjusted retroactively.

**Flavors (least to most hostile):**

- **None:** Rare; only in seed SAFEs sometimes.
- **Broad-based weighted average (standard):** Adjusts using all shares (common, options, warrants). Modest founder dilution in a down round.
- **Narrow-based weighted average:** Uses only preferred. More dilutive than broad-based.
- **Full ratchet (hostile):** Investor's price resets entirely to the new round's price. Massively dilutive to founders.

**Standard:** Broad-based weighted average.

**Pushback:** "Full ratchet is non-starter at this stage. Narrow-based is unusual. We need broad-based weighted average — this is the NVCA standard."

---

## The Full Glossary

### Board Composition

**Standard at Series A:** 2 founders / 1 investor / 1 independent (or 1 founder / 1 investor / 1 independent for solo founders).

**At Series B:** Often 2 / 2 / 1 (balanced with independent tie-breaker).

**At Series C+:** Often investors get majority (signals control transition).

**Founder protection:** Always insist on the independent seat. Independent directors prevent deadlock and provide a neutral voice.

**Pushback on investor-majority boards at A:** "Investor control of the board at Series A is premature. Let's keep founder control with an independent tie-breaker until Series B."

### Vesting (for founders)

**Founder vesting in a financing:** Investors often require founder shares to be subject to vesting (re-vesting if you already exercised). Standard: 4 years, 1-year cliff. Often the cliff is waived if you've been at the company > 1 year.

**Acceleration:**

- **Single trigger:** All unvested shares vest immediately upon change of control. Founder-friendly but rare; investors resist.
- **Double trigger (standard):** Acceleration requires (a) change of control AND (b) involuntary termination of the founder within X months. Industry standard at Series A+.

**Pushback:** "Double-trigger acceleration is industry standard. Without it, founders are exposed to acquirer post-acquisition staffing decisions."

### Pro-Rata Rights

**What it is:** The right (but not obligation) to participate in future rounds proportionally to maintain ownership.

**Standard:** Lead investor + major investors (typically those above some ownership threshold) get pro-rata. Smaller checks often don't.

**Founder impact:** Granting pro-rata is generally fine — it shows investor conviction and aligns long-term. The cost is small dilution in future rounds.

**Pushback:** Only push back if there's a long tail of small investors each demanding pro-rata; cap to "major investors" defined by ownership %.

### Drag-Along

**What it is:** If a majority approves a sale, all shareholders must agree (including minority holders, including founders who later become minority).

**Founder-friendly version:** Drag-along requires founder consent OR a minimum sale price threshold (e.g., > 3x liquidation preference).

**Hostile version:** Drag-along with no founder consent and no price floor. Investors can force a sale at any price over founder objection.

**Pushback:** "Drag-along is standard, but we need founder consent OR a price floor."

### Protective Provisions

**What it is:** Investor consent rights for certain corporate decisions.

**Standard (NVCA model):**

- Issuing new senior or pari-passu preferred stock
- Authorizing new shares above existing pool
- Liquidating, merging, or selling the company
- Amending the charter or bylaws
- Increasing the board size
- Paying dividends
- Major debt

**Aggressive (push back):**

- Approving the annual budget
- Hiring or firing executives
- Setting compensation above thresholds
- Approving individual contracts above thresholds
- Capital expenditures above thresholds

**Pushback:** "We're aligned on the NVCA standard list. Operating decisions like budget and hiring are management's responsibility — protective provisions are for fundamental corporate changes."

### Information Rights

**Standard:** Quarterly unaudited financials, annual audited financials, annual budget.

**Aggressive (push back):** Monthly financials, board observer rights, weekly KPI dashboards, inspection rights at will.

**Pushback:** "Standard quarterly + annual is enough. Monthly creates significant CFO overhead at our stage. We'll commit to ad-hoc updates on material events."

### Dividends

**Standard:** None (default).

**Acceptable:** Non-cumulative dividends "when and if declared by the board" — almost never paid in practice.

**Hostile:** Cumulative dividends accrue every year regardless of declaration and must be paid in cash at exit. This is a creeping liquidation preference.

**Pushback:** "Cumulative dividends create a hidden liquidation preference that accrues over time. Non-cumulative when-declared, or none, is standard."

### Right of First Refusal (ROFR) / Co-Sale

**What it is:** If founders try to sell shares to a third party, investors have the right to buy first (ROFR) or to sell alongside (co-sale).

**Founder-friendly:** Standard ROFR + co-sale for all preferred; founders can still do secondary up to small thresholds without triggering.

**Hostile:** No secondary at all without unanimous investor consent.

**Pushback:** "We need to allow modest founder secondary (e.g., up to $1M aggregate) without investor consent — this is needed for founder financial planning."

### Founder Liquidity

**What it is:** Built-in secondary at later rounds (Series B/C) where founders sell some shares.

**Standard:** Becoming more common; 10-20% of round size as founder secondary.

**Pushback:** Raise this in Series B+ discussions; not typically negotiated at Series A.

### Most Favored Nation (MFN)

**What it is:** If you give a later investor better terms, the MFN-holder gets the same terms retroactively.

**Common in:** Seed SAFEs and convertible notes; rare in priced rounds.

**Founder trap:** MFN provisions can prevent you from offering competitive terms to new lead investors later. Be specific about what's covered (just SAFE terms? all terms?).

### No-Shop / Exclusivity

**What it is:** During due diligence, you can't shop the round to other investors.

**Standard:** 30-45 days. Founder-friendly. Investor-aligned because it shows commitment.

**Pushback only if:** > 60 days, or if it extends post-execution of definitive docs.

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## Founder-Friendly Defaults (Cheat Sheet)

| Clause | Founder-Friendly Default |
|---|---|
| Liquidation preference | 1x non-participating |
| Anti-dilution | Broad-based weighted average |
| Option pool | 8-12%, post-money |
| Board (Series A) | 2F / 1I / 1Indep |
| Vesting (founder re-vest) | 4yr / 1yr cliff, often with credit for time served |
| Acceleration | Double-trigger |
| Pro-rata | For lead + major investors |
| Drag-along | Requires founder consent or price floor |
| Protective provisions | NVCA standard list only |
| Information rights | Quarterly + annual + budget |
| Dividends | None or non-cumulative when-declared |
| ROFR / co-sale | Standard, with carve-out for modest founder secondary |
| MFN (in notes/SAFEs) | Avoid if possible; if not, narrow scope |
| No-shop | 30-45 days |

---

## Negotiation Strategy

**Pick your battles:** A term sheet has 25-40 clauses. Winning every one is impossible and signals you don't understand priorities.

**Focus on the top 3 mistakes (in order):**

1. Liquidation preference flavor (participating vs non-participating)
2. Option pool pre-money vs post-money + size
3. Board control and protective provisions

These are the clauses where you can save 5-10% of founder economics or retain operating control. Everything else is secondary.

**The "founder-friendly NVCA" framing:** Many investors signal their posture by deviating from the NVCA model (the industry standard documents published by the National Venture Capital Association). Pushing back to "let's use the NVCA standard" is rarely rejected and resolves most issues.

**Walking away:** If a lead insists on:
- 1x participating uncapped preference
- Full ratchet anti-dilution
- Investor-majority board at Series A
- Cumulative dividends

These are not standard. A founder-friendly lead doesn't insist on these. Either walk or get specific written justification (sometimes a distressed cap-table situation justifies one of them, but never all).

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## After Signing

Once the term sheet is signed:

1. **No-shop is active.** Don't talk to other investors except to officially decline.
2. **Definitive documents (SPA, IRA, Voting Agreement, ROFR Agreement) take 4-6 weeks.** Don't lose energy here; main fight was the term sheet.
3. **Closing conditions:** legal opinion, secretary's certificate, charter filing, capitalization confirmation.
4. **Wire timing:** Investors often wire 1-3 days after charter filing. Plan accordingly.

Run `scripts/term_sheet_analyzer.py` on the structured JSON of the term sheet for an automated scoring + flag analysis.

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**Final reminder:** This document is a decoder, not a negotiation manual. Real term sheet response always involves your venture / securities counsel + your lead investor's diligence + your board (if any). Use this as a primer before those conversations.