Term Sheet

A term sheet is not paperwork. It is the economic architecture of a venture investment. In strong markets, terms converge toward founder-friendly standards. In weak markets, terms become the mechanism by which capital protects itself—sometimes appropriately, sometimes in ways that create future fragility.

Allocator framing question:
“Does the manager use structure to protect downside while keeping the company financeable—or do they impose terms that block future rounds and distort incentives?”

What’s in a venture Term Sheet (the 8 terms that matter most)

For allocators, eight elements consistently drive real outcomes:

1) Valuation / Price
Price matters, but it is often less decisive than structure in down cycles.

2) Liquidation Preference
Defines who gets paid first and how much; drives mid-exit outcomes.

3) Participation (Participating Preferred vs Non-Participating)
Determines whether preferred “double-dips” after taking preference.

4) Anti-Dilution Protection
Weighted-average vs full ratchet matters substantially in repricing regimes.

5) Option Pool
Often built “pre-money,” shifting dilution onto founders and early holders.

6) Pro Rata Rights
Defines whether investors can maintain ownership in follow-on rounds.

7) Governance & Protective Provisions
Board composition, veto rights, and consent thresholds define control under stress.

8) Seniority / Preference Stack
How this round ranks vs prior rounds determines the exit waterfall and financability.

Allocators want these disclosed consistently across the portfolio, not selectively.

Why term sheets determine financability

A company’s ability to raise the next round depends on whether the cap table and terms remain acceptable to new investors. Term choices can:

• preserve optionality (clean governance, reasonable preferences)
• or create fragility (stacked preferences, aggressive participation, hard veto grids)

In down cycles, financability becomes survival. Allocators want to see managers who can negotiate terms that protect downside without making future financing impossible.

Why term sheets determine returns (especially in non-unicorn exits)

Many VC outcomes are mid-range exits. In those outcomes, terms often determine returns more than headline valuation. Liquidation preferences, participation, and seniority decide whether proceeds flow to preferred holders or get absorbed by the preference stack.

This is why allocators care about “structure discipline,” not just “valuation discipline.”

How allocators evaluate GPs through term behavior

Conviction increases when managers demonstrate:

• consistent term posture across cycles
• ability to model and explain exit waterfalls
• governance rights used constructively (not destructively)
• transparency about down rounds, bridges, and restructures
• evidence that their term choices did not block financings or exits

Failure modes allocators look for

• “standard terms” claims without portfolio-level disclosure
• aggressive terms that harm founder/employee incentives
• preference stacks that block mid exits
• anti-dilution structures that poison future rounds
• repeated bridges that compound structural fragility

Common misconceptions

• “If valuation is good, terms don’t matter.”
  Terms dominate mid exits and stress outcomes.
• “More protection always improves returns.”
  It can reduce financability and destroy the asset.
• “Governance is secondary.”
  Governance determines survival decisions and exit timing.

Key allocator questions

• What are your default terms by stage, and where do you deviate?
• How do you model exit waterfalls across realistic exit values?
• What is your stance on participation and anti-dilution in down cycles?
• How do you preserve financability when negotiating protection?
• How often did term structure contribute to blocked financings or forced exits?