Raise money

What do the key terms in a term sheet actually mean?

The short answer

Term sheets split into economics (valuation, option pool, liquidation preference) and control (board seats, protective provisions, voting). The scary money-grabs usually hide in control terms and preferences, not the headline valuation. Read 'Venture Deals' before you sign anything, and negotiate the terms that decide who controls the company, not just the price.

Go deeper, your way

3 hand-picked resources, 3 link-checked. Pick how you want to dig in.

📖 Book
✓ Link checked Paid Advanced

Why we picked it The definitive book on how VC deals really work, written by two Foundry Group VCs. It demystifies the term sheet term-by-term so you negotiate from knowledge, not fear.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

From Wiley by Brad Feld & Jason Mendelson book (~300 pages)

  • Term sheets divide into economics and control; the dangerous clauses often live in control, not the headline valuation
  • Understand liquidation preferences, option pools, and protective provisions before you sign anything
  • Know the VC's incentives and fund structure so you can predict how they'll behave
Open venturedeals.com →
📄 Article
✓ Link checked Free Intermediate

Why we picked it The reference primer on the metrics and market-sizing logic investors use, including bottom-up market sizing that keeps founders honest about how big a market really is. Canonical a16z source.

16 Startup Metrics

From a16z by Andreessen Horowitz (a16z) ~15 min read

  • Size markets bottom-up from customer count and willingness to pay
  • Know the metrics that actually signal a healthy business
  • Distinguish real traction from vanity metrics
  • Use consistent definitions when comparing yourself to the market
Open a16z.com →
🛠️ Tool
✓ Link checked Free Intermediate

Why we picked it The primary source for the SAFE itself, plus YC's plain-English primer explaining post-money mechanics. Use the official document, not a random copy, and read the primer before you sign.

YC Safe Financing Documents (Official Post-Money SAFE)

From Y Combinator by Y Combinator templates + primer

  • Post-money SAFE lets you calculate investor ownership precisely and immediately
  • Five standard variants (cap, discount, MFN, etc.) plus an optional pro-rata side letter
  • It's a starting point usable in most situations without modification
Open ycombinator.com →

Terms in this answer

Liquidation Preference Term Sheet

People also ask

What is a SAFE and how does it actually work? A SAFE (Simple Agreement for Future Equity) lets an investor give you money now in exchange for equity later, when you raise a priced round, withou... Beginner 3 resources → What's the difference between a valuation cap and a discount on a SAFE? A cap sets the maximum valuation at which your SAFE converts, protecting the investor's upside if you raise your next round at a high price; a disc... Intermediate 3 resources → How is my startup's valuation actually decided at the early stage? At seed there's no spreadsheet truth; valuation is set by market comps, your traction, the strength of the team, and mostly by supply and demand fo... Intermediate 3 resources → How do SAFEs and term sheets differ in India versus the US? India can't use the plain US SAFE directly because of company-law constraints, so founders use the iSAFE (structured as compulsorily convertible pr... Advanced 3 resources → How much dilution should I expect across seed and Series A? Plan for roughly 10-20% dilution per priced round plus the option pool, and remember that stacked SAFEs at different caps all convert at once and c... Intermediate 3 resources → A SAFE has no valuation cap and no discount. Should I ever sign it? Almost never as a founder, because an uncapped, undiscounted SAFE means the investor is taking early risk but getting priced at whatever your next ... Beginner 3 resources →

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