What a Term Sheet Is and Is Not
A term sheet is a non-binding (with limited exceptions) summary of the principal terms of a proposed financing. It is not the deal. The actual deal lives in the priced-round documents, which for a typical Series A on the National Venture Capital Association model documents include the Amended and Restated Certificate of Incorporation, the Stock Purchase Agreement, the Investor Rights Agreement, the Right of First Refusal and Co-Sale Agreement, the Voting Agreement, and the Management Rights Letter.
Two provisions in the term sheet are typically binding: the exclusivity (or "no-shop") clause, which obligates the company to negotiate exclusively with the lead investor for a defined period, and the expense-reimbursement provision, which obligates the company to reimburse the lead investor's legal fees up to a cap if the deal closes (and sometimes if it does not). Everything else in the term sheet, including all of the economic terms, is non-binding pending execution of the definitive documents.
That said, a term sheet that has been signed by both sides is, in market practice, the deal. The economic and governance terms in a signed term sheet rarely change in the definitive documents, and any material deviation in drafting that follows the signed term sheet can fairly be described as a re-trade. Founders should sign a term sheet expecting that what they have agreed to is what will actually happen.
The Economic Terms
The economics of a Series A reduce to a small set of numbers, but the relationships between them are more important than any single one.
Investment amount
The total dollars the lead investor (and any co-investors) commit to put into the company. Sometimes a syndicate is identified, with the lead taking the largest single check.
Pre-money valuation
The agreed value of the company before the new money goes in. Pre-money plus investment amount equals post-money valuation. The price per share is computed against the company's fully diluted post-financing share count, which includes the option pool top-up (see below). Pre-money valuation is what founders most often anchor on, but post-money valuation is what determines actual ownership percentages.
Price per share
Pre-money valuation divided by the company's fully diluted pre-money share count, after giving effect to the pre-money option pool top-up. This is the conversion price for SAFEs and convertible notes that fold into the round.
Post-money valuation
Pre-money plus investment amount. The new investors' ownership percentage is investment amount divided by post-money valuation.
Liquidation Preference
The liquidation preference governs how proceeds are distributed in a sale, dissolution, or other liquidation event before the common stock receives anything. The market default in 2026 for healthy Series A rounds is a 1x non-participating preference: the preferred receives the greater of (i) its original purchase price plus any accrued and unpaid dividends, or (ii) the amount it would receive on an as-converted basis with the common.
"Non-participating" means the preferred chooses one or the other, not both. Participating preferred (where the preferred receives its original purchase price plus its as-converted share) is the aggressive variant, sometimes seen in down-rounds, distressed financings, or recap scenarios. A 2x or 3x participating preferred is highly aggressive and is rare in primary Series A rounds without specific deal context.
The conversion option allows the preferred to convert to common when the as-converted amount exceeds the preference. At very large exits, the preferred typically converts to common; at small exits, the preferred takes its preference and the common receives less than it would on an as-converted basis.
Anti-Dilution Protection
Anti-dilution protects the preferred against future down-rounds (financings at a lower valuation than the current round). The market default is broad-based weighted-average anti-dilution, which adjusts the conversion ratio of the preferred to partially compensate for the dilutive effect of the down-round. The "broad-based" qualifier means the calculation includes options, warrants, and other convertible securities in the denominator, which produces a smaller adjustment than a "narrow-based" formulation.
Full-ratchet anti-dilution (which adjusts the preferred's conversion price all the way down to the lowest subsequent issuance price) is aggressive and rare in healthy Series A rounds. Founders should resist full-ratchet outside of deeply distressed contexts. Broad-based weighted-average is the right baseline.
Carve-outs from anti-dilution typically include issuances under the equity incentive plan, issuances on conversion of existing convertible securities, issuances in connection with strategic transactions approved by the preferred board members, and issuances in connection with debt financing approved by the preferred board members.
The Pre-Money Option Pool Top-Up
This is the term founders most consistently underestimate. Series A investors typically negotiate that the post-financing equity incentive plan (option pool) be sized at 10 to 15 percent of the post-financing fully diluted share count, with the increase to that level coming out of the pre-money valuation. The mechanical effect is that the pool top-up dilutes the founders and existing common, not the new investors.
A worked example: $40 million post-money round at $30 million pre-money plus $10 million new money, with a 10 percent pool top-up. The investors believe they are "valuing" the company at $30 million pre-money. But the pool top-up is computed inside that $30 million, so the founders' actual pre-financing pre-pool implied valuation is roughly $26 million, not $30 million. The 10 percent pool comes out of the founders' share, not the investors' share. The new investors get 25 percent of the post-money company; the pool is another 10 percent of the post-money company; the founders + existing common end up with the remaining 65 percent.
Where to push: argue for a smaller pool size if the next 12 to 18 months of hiring can be supported with less than 10 percent of post-money equity. The right method is to build a hiring plan with anticipated grants and back into the actual pool size required. The investors' counsel will typically push for the higher pool to be safe; founder-side counsel pushes for the lower pool that is actually needed.
Governance and Board Composition
The Series A is the round at which the board changes meaningfully. The classic Series A configuration is a five-person board with two seats elected by the common (typically the founders), two seats elected by the preferred (the lead investor and frequently a designee or co-investor), and one independent seat mutually agreed by the common and preferred boards.
Variations are common. A 3-person board (1 founder, 1 investor, 1 independent) is appropriate for very early Series A rounds. A 7-person board appears in Series B+ contexts where multiple preferred classes have seats. The structural question for founders is whether the board, in its operating composition, supports the founder team's autonomy or constrains it.
Voting Agreement: the lead investor's term sheet usually specifies that all stockholders agree to vote their shares in favor of the agreed board composition. The Voting Agreement is the document that operationalizes that.
Drag-Along Right: typically included in the Voting Agreement, this provision lets a defined supermajority of stockholders force the minority to participate in a sale of the company. Founder-side counsel should negotiate the supermajority threshold, the carve-outs (e.g., the drag does not apply if the founders are required to sign restrictive covenants), and the consideration cap (typically the founders cannot be required to take more than their pro-rata share of any escrow or indemnification).
Protective Provisions
The Certificate of Incorporation creates a defined list of corporate actions that require the affirmative consent of the preferred (or a defined holder threshold of preferred). The standard list includes:
- Amendments to the certificate of incorporation or bylaws that adversely affect the preferred
- Authorization or issuance of new senior or pari passu securities
- Sale or other liquidation event of the company
- Increases in the size of the option pool (above the size at the time of the round)
- Material changes to the principal business of the company
- Incurrence of debt above a defined threshold
- Payment of dividends or stock repurchases (with limited carve-outs)
The negotiation here is rarely about the substantive list (which is mostly standard) and almost always about the threshold required to invoke the protective provision. The two principal options are a class vote of the preferred (every share votes equally) or a "major investor" threshold (only investors above a defined check size have the right). Founders should push for the major-investor threshold to be high enough that small investors with no operational role in the company cannot block ordinary-course corporate decisions.
Information and Pro-Rata Rights
The Investor Rights Agreement contains the information rights (audited annual financial statements, unaudited quarterly financial statements, annual budget, and "ad hoc" information requests within reason) and the pro-rata rights (the right to participate in subsequent financings up to the holder's then-current ownership percentage to maintain ownership).
Both rights are standardly limited to "major investors," defined by a check-size or share-count threshold. Founders should push for a high threshold so that the company is not obligated to deliver detailed financial information to small angels or to coordinate around their pro-rata participation in later rounds. A typical major-investor threshold is $500K or $1M of original investment, or a corresponding percentage ownership.
Information rights typically terminate on the company's IPO. Pro-rata rights typically terminate on the company's IPO and may also terminate on the holder's transfer of shares below the major-investor threshold.
ROFR and Co-Sale
The Right of First Refusal (ROFR) and Co-Sale Agreement governs transfers of common stock by founders. If a founder proposes to transfer shares to a third party, the company has the first right to purchase the shares; if the company declines, the major investors have a second right; if the major investors decline, the founder may transfer to the third party, but the major investors have the right to "co-sell" their pro-rata share alongside the founder.
The practical effect is that founders cannot freely sell stock secondary to a third party without the company and the major investors having the option to either buy in or sell alongside. This is, on the merits, a reasonable governance constraint that the major investors are entitled to, but founders should negotiate carve-outs for permitted transfers (estate planning, gifts to family members, transfers to grantor trusts) and for de minimis transfers (transfers below a defined dollar threshold or percentage of ownership).
Vesting and Acceleration
If the company has been operating for some time before the Series A and the founders' vesting is largely complete, the lead investor will frequently negotiate a "vesting reset" in the term sheet. The reset typically extends the vesting schedule for some portion of the founders' shares (often the most recently vested portion), so that the founders continue to have skin in the game post-financing.
Acceleration on a change of control comes in two forms. Single-trigger acceleration vests the unvested shares on a change of control alone, which is aggressive in the founder's favor. Double-trigger acceleration vests the unvested shares only if the change of control is followed (within a defined window, typically 12 to 18 months) by termination without cause or resignation for good reason. Investors generally accept double-trigger; single-trigger usually requires specific deal context.
Founder-side counsel should ensure that "good reason" is defined to include meaningful diminution in role, compensation, or location, and that "cause" is defined narrowly to include only egregious conduct. Bad-faith terminations that strip vested shares are a known plaintiff-side cottage industry and should not be possible under the documents.
Exclusivity and Conditions
The exclusivity clause is binding. Typical durations are 30 to 60 days. Founders should not sign exclusivity longer than what is needed to close the round, and should make sure the clause does not prevent the company from continuing to operate normally (which sometimes includes ongoing fundraising conversations that were already in progress).
Conditions to closing typically include satisfactory completion of due diligence, satisfactory legal documentation, no material adverse change, accuracy of representations and warranties, and absence of any litigation that would prevent the round. Founders should be prepared for diligence that revisits the corporate record, the cap table, IP assignment, employment matters, key contracts, prior financings, and any pending litigation or regulatory issues.
What to Push, What to Concede
Push hardest on:
- Pre-money option pool size. Each percentage point materially affects founder dilution.
- 1x non-participating liquidation preference (the modern norm).
- Broad-based weighted-average anti-dilution (resist full-ratchet).
- Board composition that preserves at least two founder seats through Series A.
- Major-investor threshold for protective provisions and information rights (so small investors cannot block ordinary-course operations).
- Double-trigger acceleration on change of control with appropriate "good reason" definition.
- Carve-outs in ROFR/Co-Sale for estate planning and de minimis transfers.
Often worth conceding:
- Standard NVCA protective-provisions list (negotiate the threshold, not the list).
- Standard information rights at customary thresholds.
- Drag-along rights with reasonable threshold and customary carve-outs.
- ROFR/Co-Sale on founder transfers, with the carve-outs above.
- Customary diligence conditions and reps and warranties.
For background on how the term-sheet negotiation fits into the broader formation and financing architecture, see our long-form guide on Setting Up a Venture: Formation, Capitalization, and Term Sheets and our companion insights on SAFE conversion at Series A and QSBS.