VC Term Sheet Explainer
Analyze Economics, Control, and Exit Scenarios
Investment Inputs
Term Sheet Levers
Exit Scenario
Post-Money Val
$5.0M
Investor Ownership
20%
Founder/Common
80%
Economic Terms
Pre-Money Valuation
The value of the company before the new cash comes in. This determines the price per share before dilution.
Post-Money Valuation
Simply: Pre-Money + Investment Amount. The math for ownership % is usually (Investment / Post-Money).
Option Pool
Shares set aside for future employees. Key Trick: If the pool comes out of the *pre-money*, it dilutes the founders only. If *post-money*, it dilutes everyone.
Liquidation Preference
The "safety net" for investors. A "1x" preference means they get their money back before common shareholders see a dime.
Legal & Process Terms
No-Shop Clause
Prevents the company from soliciting other offers once a Term Sheet is signed for a set period (usually 30-60 days).
Drag-Along Rights
If a majority of shareholders vote to sell the company, minority shareholders are forced (dragged along) to sell their shares too.
Board of Directors
The Board hires/fires the CEO and approves major decisions (Budget, IPO, M&A).
Common Structure (Seed/Series A):
- 1 Seat: Founder (Common)
- 1 Seat: Investor (Preferred)
- 1 Seat: Independent (Mutually Agreed)
Protective Provisions (Veto Rights)
Even with a minority stake (e.g., 20%), investors demand veto power over specific actions to protect their investment.
Common Veto Items
- Changing the Certificate of Incorporation.
- Issuing new stock senior to the investors (Parity is usually okay).
- Buying back shares (Redemption).
- Selling the company (Merger/Acquisition) below a certain price.
- Changing the size of the Board.