Term Sheet Cheat Sheet
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Claudio Cammelli, Founder & CEO, Vivan AG (digital beverage marketplace)The 5 terms to fight for in your first term sheet
Even though a term sheet is only a few pages long, everything after it follows what it says. It is legally non-binding, but commercially, the deal usually doesn't get better after you sign it.
The Term Sheet Cheat Sheet explains every term in a seed term sheet in plain words, with the market standard to aim for and how hard to push.
OVERVIEW
Here are the five terms that shape your first round.
No. 1: Liquidation preference
This clause sets who gets paid first when the company is sold. The standard is 1x non-participating, and it is the one term on this page not to give up. Any stronger liquidation preferences can leave founders with very little on a modest exit.
No. 2: Anti-dilution
Anti-dilution kicks in when a later round is priced below this one. Broad-based weighted average is the market standard. A full ratchet at seed is a walk-away point.
No. 3: The option pool (ESOP)
The pool for future hires can be counted before or after the investment, and that choice moves percentage points between founders and investors. If it is counted post-money, both sides share the dilution.
No. 4: Board and protective provisions
After the round, the board and the investor's consent list steer the company. A founder-leaning board is normal at seed. So is a consent list that leaves the budget and hiring with you.
No. 5: Drag-along
A drag-along can pull every shareholder into a sale, including founders who were against it. Tie it to a majority that includes the founders.
Worth a look
Valuation, founder vesting, and tag-along rights are usually fine, but read the detail. Run the post-money math on your own stake before you agree to a valuation. On vesting, read the bad-leaver terms closely, since they can reach shares a founder has already earned. The tag-along should work both ways.
Safe to accept
Pro-rata rights, information rights, the right of first refusal, and the fine print on reps and warranties, expenses, and exclusivity are customary. You can sign them with confidence as long as your liability is capped.
Before you sign
Put your term sheet next to the Cheat Sheet and mark each term as fight, check, or accept. Write down your position on the top five before the first negotiation call. Push while you still have leverage, which means before exclusivity starts running.
This blog post is for discussion and general information purposes only and should not be considered legal advice.
Put the Cheat Sheet into practice
Your first 30-minute founder session with us is free. Before you start pitching investors, we sit down with you and pressure-test your financing strategy against the terms above. Then we go through the clauses that will matter most in your deal, so you know the terms you want before you get the first term sheet.
We have supported more than 210 startups and investors and worked on over CHF 330M in venture deals, so we know where investors usually give ground. If we are a good fit, the same team negotiates the long-form documents with you and takes the round to closing.
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