What founders should check in a first term sheet
Dilution, liquidation preference and control decide what a first term sheet really costs a founder, and which clauses are worth negotiating.
A term sheet is not a contract, but it shapes the contract that follows. The money is only one line of it. Founders who read the rest carefully, and negotiate the few clauses that really matter, avoid years of trouble later.
Dilution: what you are giving up
Dilution means a smaller slice of a bigger company, and that is not automatically bad. What matters is your percentage after the round closes, and what could dilute you further. An option pool created at the same time, a bridge loan, or a later round can all take more from your side.
Ask for the fully diluted figure, not the simple one. Then ask what a follow-on round would do to it.
Liquidation preference
This clause decides who is paid first if the company is sold. A one-time, non-participating preference is common and reasonably fair: the investor gets their money back, and the rest is shared among the owners.
Watch for a participating preference. There the investor takes their money back and then shares the remainder as if they had invested less. In a modest sale it can leave founders with very little. Check the multiple as well, since a preference above one times the amount invested is worth questioning.
Control and the board
- Who sits on the board, and who breaks a tie?
- Which decisions need investor approval?
- Can a protective clause block an ordinary hire or a small loan?
Investors normally want a seat and a list of reserved matters. Long lists of vetoes over day-to-day running are a different thing, and they are easier to negotiate before you sign than after.
Smaller lines that still matter
Founder vesting is worth reading closely, not just employee vesting. So is the exclusivity period, which stops you talking to other investors for a set time; a long period tied to a slow investor can cost you a better offer. In India, sebi.gov.in sets out the rules that govern how regulated investment funds may operate.
Read the term sheet as if the company does well but not spectacularly. That is where the hard clauses bite.
The bottom line: dilution is normal, control is negotiable, and the liquidation preference is the clause most founders should read twice. Take paid legal advice before you commit.