A term sheet for a seed or Series A financing is usually three to six pages. Most of it looks straightforward — until you realize that every defined term has years of market practice behind it, and that some terms that appear minor on the page have major economic consequences at exit.
This glossary covers the terms that actually move the needle. Each one includes a plain-English definition and an explanation of why it matters in practice.
Pre-Money Valuation
What it is: The value assigned to the company before the new investment is made. Post-money valuation equals pre-money plus the new investment. Investor ownership percentage equals the investment divided by post-money valuation.
Why it matters: If the pre-money is $8 million and the round is $2 million, investors own 20% of the company post-closing. Founders often confuse pre-money and post-money valuations, particularly with post-money SAFEs (which convert based on post-money valuation, meaning more SAFEs dilute each other but not the Series A investors). Know which number you are negotiating.
Option Pool
What it is: The block of shares reserved for future employee equity grants, typically set at 10–15% of the fully diluted capitalization on a post-money basis.
Why it matters: The option pool is almost always created from the pre-money shares — meaning it dilutes founders, not investors, before the round even closes. If the pre-money valuation is $8 million but you need to create a new 15% option pool, the effective pre-money for founders is lower than it appears. Ask specifically whether the option pool is being sized and created pre- or post-money, and negotiate the size down to what you will realistically need in the next twelve to eighteen months.
Liquidation Preference
What it is: The amount preferred stockholders receive before common stockholders in a sale, liquidation, or other exit event. A 1x non-participating liquidation preference means investors get their money back first (1x their investment), after which common stockholders share the remaining proceeds.
Why it matters: Participating preferred is the alternative — and it is dilutive to founders. With participating preferred, investors get their 1x back first AND participate alongside common stockholders in any remaining proceeds as if they had converted. In a large exit this matters less; in a modest outcome it can dramatically reduce what founders receive. Push for 1x non-participating. Multiple liquidation preferences (2x, 3x) are aggressive and should be resisted in any form.
Participation Rights / Pro-Rata
What it is: The right of existing investors to participate in future financing rounds in proportion to their current ownership, thereby avoiding dilution.
Why it matters: Standard pro-rata is reasonable — it lets investors maintain their percentage. Super pro-rata gives investors the right to buy more than their proportionate share of future rounds, which can crowd out new investors and create tension. Be cautious about granting super pro-rata rights broadly across your investor base.
Anti-Dilution
What it is: A mechanism that protects investors from dilution in a down round by adjusting their conversion ratio (the rate at which preferred shares convert to common shares).
Why it matters: There are two main variants. Broad-based weighted average anti-dilution adjusts the conversion price using a formula that accounts for the size of the down round relative to total shares outstanding — it is the standard, founder-friendly form. Full ratchet is the aggressive alternative: if the company raises at a lower price, the investor's conversion price resets all the way down to the new lower price, regardless of how small the down round was. A full ratchet in a single down round can wipe out a significant portion of founder and employee equity. Resist full ratchet in any form.
Board Composition
What it is: The number of seats on the board of directors and who fills them.
Why it matters: Who controls the board controls the company. The standard Series A board is five seats: two founders, two investor-appointed directors, and one independent director jointly selected by the founders and investors. Watch out for term sheets that give investors three of five seats, which immediately shifts board control regardless of founder ownership percentage. The independent director selection process — and what happens if the parties cannot agree on an independent — should be specified.
Protective Provisions
What it is: Actions the company cannot take without the consent of preferred stockholders (or a defined majority of them) voting as a separate class.
Why it matters: The standard list covers things investors should reasonably have a say on: authorizing new preferred stock, amending the charter or bylaws in ways that adversely affect preferred holders, approving a sale of the company, declaring dividends. The problem arises when investors try to add unusual items — approval rights over operating budgets, approval rights over debt above a threshold, approval rights over individual hires. Each additional protective provision is an investor veto over company operations. Review this list carefully and push back on anything that goes beyond standard governance.
Drag-Along
What it is: The right of a defined majority of stockholders to force all other stockholders to approve a sale of the company on the same terms.
Why it matters: A drag-along provision prevents minority holders from blocking an acquisition. The critical detail is who controls the drag — which majority must vote in favor before others are dragged along. A drag triggered by preferred stockholders alone (without founder or common stockholder consent) gives investors the ability to force a sale the founders oppose. Negotiate for a drag that requires consent from a majority of common stockholders (or the board) in addition to the preferred.
Information Rights
What it is: The financial and operational reporting the company must provide to investors, typically specified as monthly financials, annual audited financial statements, and sometimes a budget for the upcoming year.
Why it matters: Annual audited financial statements are expensive — an audit can cost $20,000 to $60,000 for an early-stage company. For seed and early Series A rounds, push for unaudited annual financials until the company reaches a scale where an audit is practical. Monthly reporting requirements are typically fine and create useful operating discipline.
No-Shop / Exclusivity
What it is: A binding provision (one of the few binding provisions in a term sheet) requiring the company to stop soliciting other investors during a defined period while the deal is being finalized.
Why it matters: This is binding. Once signed, you cannot shop the deal to other investors. Keep the exclusivity period as short as possible — 30 to 45 days with clear milestone obligations on the investor (completing due diligence by a date certain, providing draft documents by a date certain). An open-ended exclusivity period gives the investor the ability to string the deal along while you are locked out of the market.
Pay-to-Play
What it is: A provision that penalizes investors who do not participate in future financing rounds, typically by converting their preferred stock to common stock or causing them to lose their anti-dilution protection.
Why it matters: Pay-to-play provisions protect the company from investors who want rights and preferences but won't provide follow-on capital when needed. They are more common in challenging financing environments. From a founder perspective, they are generally favorable — they incentivize investors to continue supporting the company.
Full Ratchet
What it is: The most aggressive form of anti-dilution protection, described above under "Anti-Dilution."
Why it matters: It bears repeating separately because of how severely it can affect founders. If a company raises a down round — even a small bridge at a lower price — a full ratchet resets every affected investor's conversion price to the new low price. In a $5 million Series A with a full ratchet, followed by a $1 million bridge at half the price, the Series A investors' conversion ratio doubles. Founders and employees bear the full cost of that adjustment. Do not accept full ratchet anti-dilution in any financing.
A Final Note on Negotiating the Term Sheet
The term sheet is non-binding on most economic terms — but it sets the baseline for every negotiation that follows. The terms you accept in the term sheet are the terms you will see in the definitive documents, the stockholders agreement, and the certificate of incorporation, usually with only minor modifications. Investors are not inclined to renegotiate what you already agreed to.
This is the point in the process to push back on provisions that are unreasonable. Once you are in definitive documents, the leverage shifts significantly toward the investor — you have already taken the company off the market and your team knows a deal is in progress. Negotiate hard on the term sheet. Once it is signed, assume those are the terms.