The decoder
Every deal term, explained for a small cheque
Term sheets are written by people who do this for a living, for people who do this for a living. These 45 entries translate them for everyone else — what each term means, the arithmetic it produces, what to push back on, and the trap that costs angels the most money.
Start here
The five that decide your outcome
If you read nothing else before your next investment, read these. Each one moves more money than the valuation everybody argues about.
Liquidation preference
Who gets paid first when the exit disappoints — which is most exits.
02Valuation cap
One number, negotiated once, worth a 4× difference in your final outcome.
03Pro-rata rights
The most valuable thing a small cheque can ask for, and the standard SAFE omits it.
04Share classes
Paying a preferred price for ordinary shares is the quiet mistake angels make most.
05Exit waterfall
The only calculation that tells you what your shares are really worth.
06Drag-along rights
The clause that removes your ability to say no. Read it before you invest, not after.
7 terms
Instruments
The paper you actually buy. Whether your money is equity today, equity later, or a loan that hopes to become equity.
SAFE
A short agreement in which you pay cash now for shares issued later, at a price set by a future priced round — with no interest, no maturity date and no repayment.
Convertible note
A short-term loan to a startup that is intended to convert into shares at the next priced round rather than be repaid, usually with an interest rate, a maturity date, a cap and a discount.
Priced round
A financing in which the company and its investors agree a valuation, set a price per share, and issue shares immediately — as opposed to deferring the price to a later round.
Advance subscription agreement
A UK instrument in which you pay for shares in advance and they are issued at a later round's price, structured so that the payment can never be repaid as cash — which is what preserves SEIS and EIS relief.
Special purpose vehicle
A single-purpose company or fund formed to pool several investors' money into one line on a startup's cap table, usually run by a lead who charges a fee, carry, or both.
Syndicate carry
The share of an investment's profit — conventionally 10% to 20% — paid to the person who sourced, diligenced and led the deal, in exchange for letting others invest alongside them.
Nominee vs direct shareholding
Whether your shares are registered in your own name or held for you by a nominee company that appears on the register in your place — a distinction that decides who votes, who is informed, and how easily you can sell.
7 terms
Price & valuation
What you are paying per share, and the surprisingly large number of ways a headline valuation can mislead you.
Valuation cap
The maximum valuation at which your SAFE or convertible note will convert into shares, no matter how high the company's next round is priced.
Discount rate
A percentage reduction — typically 10% to 25% — applied to the price per share of the next priced round when your SAFE or note converts.
Pre-money vs post-money
Pre-money is what the company is agreed to be worth before the new investment lands; post-money is that figure plus the money raised — and your ownership is always calculated on the post-money number.
Post-money SAFE
The current standard SAFE, in which the valuation cap is a post-money figure — so your percentage of the company is fixed at signing and cannot be diluted by other SAFEs issued afterwards.
Most favoured nation clause
A provision entitling you to adopt the better terms of any subsequent convertible instrument the company issues before your own converts.
Down round
A financing priced below the company's previous round, which dilutes existing holders disproportionately and typically triggers anti-dilution adjustments in favour of earlier preferred investors.
Bridge round
A short financing intended to carry a company from where it is to a larger round or to profitability, usually raised from existing investors on convertible paper.
6 terms
Cap table & dilution
Who owns what, and how your slice shrinks over the eight to twelve years before anybody gets paid.
Cap table
The register of who owns what proportion of a company — every share, option, warrant and convertible instrument, and what each of them becomes at an exit.
Dilution
The reduction in your percentage ownership when a company issues new shares — a mathematical certainty in venture that reduces your slice while, in a good outcome, increasing its value.
Option pool shuffle
The practice of creating or enlarging an employee option pool inside the pre-money valuation, so that the dilution falls on existing shareholders rather than on the incoming investor.
Fully diluted
A share count that includes everything capable of becoming a share — issued shares, all options whether granted or merely reserved, warrants, and every outstanding convertible instrument.
Share classes
The different types of share a company issues — ordinary shares for founders and employees, preferred shares for investors — carrying different rights on payout, voting and protection.
Conversion mechanics
The specific rules that turn your SAFE or note into shares — which financings trigger it, at what price, into which class, and what happens if no qualifying round ever arrives.
5 terms
Downside protection
The clauses that decide who gets paid first when the exit is smaller than everyone hoped — which is most exits.
Liquidation preference
The right of preferred shareholders to be paid a set amount — normally the money they invested — before ordinary shareholders receive anything from a sale or winding up.
Participating preferred
Preferred shares that take their liquidation preference off the top and then also share in the remaining proceeds alongside ordinary shareholders — being paid twice from the same exit.
Anti-dilution protection
A provision that adjusts preferred shareholders' conversion price downward if the company later issues shares more cheaply, giving them additional shares at the expense of ordinary holders.
Pay-to-play
A provision that strips investors of their preferred rights — usually by converting their shares to ordinary — if they decline to invest their pro-rata share in a future round.
Seniority
The order in which different classes of preferred shares are paid from exit proceeds — whether later rounds rank ahead of earlier ones, or all preferred ranks equally.
6 terms
Rights & follow-on
What you are entitled to after the wire clears: information, the chance to keep investing, and the right to sell.
Pro-rata rights
The right, but not the obligation, to invest enough in future rounds to maintain your existing percentage of the company.
Information rights
The contractual right to receive financial statements, budgets and updates from the company on a defined schedule — rather than depending on the founder remembering to write.
Side letter
A short separate agreement giving a specific investor rights that are not in the main round documents — most commonly pro-rata, information rights or a board observer seat.
Right of first refusal
The right of the company or its investors to buy shares that a shareholder wants to sell, on the same terms as the proposed third-party buyer, before that sale can proceed.
Tag-along rights
The right to sell a proportionate part of your shareholding on the same terms whenever a founder or major shareholder sells theirs.
Drag-along rights
A provision allowing a defined majority of shareholders to compel every other shareholder to sell on the same terms, so that a buyer can acquire 100% of the company without holdouts.
5 terms
Control & governance
Who decides. Board seats, veto rights, and the vesting that keeps founders at their desks.
Board seat
A place on the company's board of directors, carrying a vote on major decisions and legal duties owed to the company rather than to the investor who appointed you.
Board observer
The right to attend board meetings and receive board materials without a vote, a fiduciary duty, or the personal liability that comes with a directorship.
Protective provisions
A list of company actions that cannot be taken without the consent of a specified majority of preferred shareholders — regardless of what the board or the founders want.
Founder vesting
An arrangement under which founders earn their own shares over time — typically four years with a one-year cliff — so that a founder who leaves early forfeits the unearned portion.
Employee option pool
Shares reserved for issue to employees as options, giving them the right to buy at a fixed strike price and share in the company's growth.
4 terms
Exit & liquidity
How money actually comes back — the waterfall, the secondary market, and the exits that are really hires.
Exit waterfall
The order in which sale proceeds are distributed — creditors first, then each preferred class by seniority, then ordinary shareholders — and the calculation that tells you what your shares are actually worth.
Secondary sale
The sale of existing shares by a shareholder to a new buyer, as distinct from the company issuing new shares — the main route to liquidity before a company exits.
Redemption rights
The right of preferred shareholders to require the company to buy back their shares after a stated period, usually at the original price plus accrued dividends.
Acqui-hire
An acquisition whose purpose is to hire the team rather than to buy the product, typically priced per engineer and structured so that most of the value goes to employees as retention packages rather than to shareholders.
5 terms
Process & paperwork
Term sheets, warranties, disclosure letters and the one tax election that has cost American angels the most money.
Term sheet
A short, mostly non-binding summary of a proposed investment's key terms, signed before the full legal documents are drafted.
No-shop / exclusivity
A binding commitment by the company not to solicit or negotiate with other investors for a defined period after signing the term sheet.
Warranties & representations
Statements of fact about the company given by the company and sometimes its founders in the investment documents, which give investors a claim if they turn out to be untrue.
Disclosure letter
A document delivered alongside the investment agreement in which the company sets out the exceptions to its warranties — everything that would otherwise make a warranty untrue.
83(b) election
A US tax election, filed within 30 days of receiving restricted stock, to be taxed on its value at grant rather than as it vests — a deadline with no extensions and severe consequences for missing it.
The other side of the table
What founders are taught about all this
Kirsty Nathoo - Managing Startup Finances
YC's CFO on how early companies actually handle money, cap tables and the paperwork around them. It is the founder-side view of most of what this decoder explains.
Published by Y Combinator. Channel verified from ycombinator.com, and YouTube's own oEmbed response names that channel as this video's author. Pressing play loads content from YouTube.
A to Z
Every term, alphabetically
- 83(b) election
- Acqui-hire
- Advance subscription agreement
- Anti-dilution protection
- Board observer
- Board seat
- Bridge round
- Cap table
- Conversion mechanics
- Convertible note
- Dilution
- Disclosure letter
- Discount rate
- Down round
- Drag-along rights
- Employee option pool
- Exit waterfall
- Founder vesting
- Fully diluted
- Information rights
- Liquidation preference
- Most favoured nation clause
- No-shop / exclusivity
- Nominee vs direct shareholding
- Option pool shuffle
- Participating preferred
- Pay-to-play
- Post-money SAFE
- Pre-money vs post-money
- Priced round
- Pro-rata rights
- Protective provisions
- Redemption rights
- Right of first refusal
- SAFE
- Secondary sale
- Seniority
- Share classes
- Side letter
- Special purpose vehicle
- Syndicate carry
- Tag-along rights
- Term sheet
- Valuation cap
- Warranties & representations
Deal terms: common questions
Which deal terms matter most to a small angel cheque?
What is the difference between a SAFE and a convertible note?
Do angels get to negotiate deal terms at all?
Why does my percentage of the company matter less than I think?
Next
Terms are half of it
Knowing what a clause does is not the same as knowing whether the company is worth backing, or how many cheques you need to write for the maths to work.