A term sheet is a short, mostly non-binding document that sets out the key terms of an investment. Founders naturally focus on valuation, yet several less-discussed clauses can matter far more when the company is sold or runs into trouble.
Liquidation preference
This decides who gets paid first, and how much, when the company is sold. A simple one-times preference returns investors’ money before others; multiples or participation rights can take much more.
Board composition
Who sits on the board decides who can hire or fire the chief executive and approve major decisions. Track how control shifts over successive rounds.
Valuation is the number everyone remembers; control terms are the ones that decide outcomes.
Protective provisions and pro-rata
Investors often gain veto rights over certain actions and the right to invest in future rounds. Understand each one before signing, ideally with an experienced lawyer.
Key takeaways
- Liquidation preference
- Board composition
- Protective provisions and pro-rata
