The craft
Your first term sheet
What to read, in what order, when a term sheet lands and you are not the lead — and the three things a small cheque can realistically change.
Realistic time One to two hours
The first term sheet an angel sees is intimidating for about twenty minutes and then it is not. It is a short document, most of it is standard, and the parts that decide your outcome are a handful of clauses that can be read in half an hour once you know which ones they are.
The thing to be clear about from the start is your position. Unless you are writing a very large cheque, you are not negotiating the round — the lead is. What you can negotiate is your own arrangement with the company, which is a smaller conversation and one that founders are usually happy to have.
That means the exercise has two parts: understanding what you are joining, which is reading, and securing what you can, which is a short and specific ask.
01
Read these first, in this order
Share class comes first. If the lead is taking preferred shares and you are being offered ordinary shares at the same price, you are paying for downside protection you will not receive, and in a modest exit that decides everything. It is one question and it is the most valuable one you will ask.
Liquidation preference second. Establish the multiple, whether it participates, and what the total preference stack will be after this round. Then compare that stack with a realistic exit value for this company in this sector. If a plausible good outcome leaves ordinary holders dividing very little, you now know something the percentage did not tell you.
Pro-rata rights third. Do you have them, do they have a minimum-investment threshold, and do they survive future rounds. This is the term most worth asking for if it is absent.
Check
- Which share class are non-lead investors receiving?
- Liquidation preference: multiple, participation, and the total stack after the round.
- Pro-rata rights: present, threshold, and survival.
- Anti-dilution formula — broad-based weighted average is standard.
- Option pool size, and whether it sits inside the pre-money.
- Drag-along threshold and your warranty obligations.
02
Do the waterfall arithmetic
Take twenty minutes and build the exit waterfall at three values: a disappointing exit, a decent one, and the one everybody is imagining. Deduct transaction costs, deduct debt, pay the preference stack in seniority order, and see what reaches ordinary shareholders.
This single exercise changes more angel decisions than any other, because it converts a percentage into a number. An investor holding 1% of a company that sells for $60m may receive anything from nothing to $600,000 depending on what sits ahead of them, and the term sheet contains the information needed to work out which.
Check
- Model a poor, a decent and a good exit value for this company.
- Deduct transaction costs and any debt first.
- Pay the preference stack in seniority order.
- Calculate what reaches ordinary holders, and what reaches you.
- Identify the exit value at which your shares become worth something.
03
What you can realistically change
Three things, and they go in a side letter rather than in the round documents: pro-rata rights, information rights including a place on the investor update list, and an MFN if you are investing on a convertible instrument.
All three cost the company nothing today, which is exactly why they are usually granted. The request should be short, specific and made before you commit — a one-page letter asking for two or three things gets signed; a six-page letter asking for eight things goes to a lawyer and may not.
What you cannot realistically change is the valuation, the preference, the board composition or the protective provisions. Those belong to the lead, and asking for them signals that you have misjudged the size of your cheque.
Check
- Ask for pro-rata rights in a side letter.
- Ask to be on the investor update list, and for annual accounts and the cap table on request.
- On a convertible, ask for an MFN with a notification obligation.
- Keep the ask to one page and two or three items.
- Make the request before committing, not after.
04
Before you wire
Confirm the wiring details by voice with someone you know at the company, on a number you already have. Investment fraud through intercepted or spoofed email is a real and recurring problem, and the instruction to verify by phone is the one piece of process advice in this guide that has no exceptions.
Then keep your records: the executed documents, any side letter, the cap table you were shown, and a one-page note of what you invested, on what terms, and why. In year eight, when the people have changed and the details have gone, that note is worth a great deal.
Check
- Verify wiring details by voice, on a number you already have.
- Keep executed copies of every document, including any side letter.
- Note any maturity dates, notice periods or election windows that apply to you.
- Write a one-page record of the investment thesis and the terms.
- Diarise a reminder to check in at six months.
Stop and think
Red flags
- Non-lead investors offered ordinary shares at the same price as the lead's preferred.
- A liquidation preference above 1×, or a participating preference.
- A full ratchet anti-dilution provision at seed.
- A preference stack that makes any realistic exit worthless to ordinary holders.
- A drag-along requiring passive investors to give full business warranties.
- Pro-rata rights that terminate at the next institutional round.
- Any pressure to wire before the documents have been read.
Take these into the room
Questions to ask the founders
- Which share class am I receiving, and is it the same as the lead's?
- What is the total liquidation preference after this round closes?
- Do I have pro-rata rights, and do they survive the next round?
- What are my warranty obligations if the drag-along is exercised?
- Where does the option pool sit in the pre-money calculation?
- May I have a short side letter covering pro-rata and information rights?
From the decoder