How to Read a Term Sheet in 15 Minutes: A First-Time Founder's Checklist

You just got your first term sheet. Congratulations—this is a huge milestone. But now you're staring at a 3-5 page document full of legal terms, and you have 48-72 hours to respond before the investor moves on.

Don't panic. This guide will help you understand the key terms in about 15 minutes, so you can have an informed conversation with your lawyer (yes, you still need one) and know what questions to ask.

The 15-Minute Term Sheet Review

Here's the order in which to review your term sheet, organized by importance:

First 5 Minutes: The Economics

These terms determine how much of your company you're giving away and under what conditions:

1. Pre-Money Valuation

This is what investors say your company is worth before their investment. If your pre-money valuation is $8M and they're investing $2M, your post-money valuation is $10M, and they own 20%.

What to watch for: Make sure you understand whether the option pool is included in the pre-money valuation (it usually is, which effectively lowers your valuation).

2. Investment Amount

How much money is coming in, and from whom. Look for whether there are multiple investors and if so, who's leading.

3. Liquidation Preference

This determines who gets paid first if the company is sold. A "1x non-participating" preference is standard—investors get their money back first, OR convert to common stock, whichever is higher.

Red flag: Participating preferred (investors get their money back AND their pro-rata share) or anything above 1x.

4. Option Pool

The percentage of the company reserved for future employee equity. Standard is 10-20% at seed stage.

What to watch for: A larger-than-necessary option pool carved out of the pre-money valuation dilutes existing shareholders more.

Next 5 Minutes: Control & Governance

These terms determine who makes decisions:

5. Board Composition

Who sits on the board and how many votes each side gets. At seed stage, a common structure is 2 founders + 1 investor, or 2 founders + 1 investor + 1 independent.

Red flag: Investor majority or investor veto over routine business decisions at seed stage.

6. Protective Provisions

These are actions that require investor approval—things like selling the company, raising more money, changing the charter, etc.

What's standard: Approval for major transactions (sale, IPO, new financing rounds).

Red flag: Approval required for hiring, firing, or compensation decisions.

7. Voting Rights

How much say investors have in shareholder votes. Typically, preferred stock votes on an as-converted basis with common stock.

Final 5 Minutes: Other Key Terms

8. Anti-Dilution Protection

"Broad-based weighted average" is standard and fair. "Full ratchet" heavily favors investors if you ever raise a down round.

9. Pro-Rata Rights

The right for investors to maintain their ownership percentage in future rounds. Standard for lead investors.

10. Information Rights

What financial information you must share with investors. Monthly or quarterly financials are typical.

11. Founder Vesting

Whether your existing shares are subject to vesting. Some investors require founders to "re-vest" over 4 years with a cliff.

12. No-Shop Clause

How long you agree not to talk to other investors. 30-45 days is standard; 60+ days is aggressive.

Quick Reference: What's Standard vs. What's Aggressive

Term	Standard	Aggressive
Liquidation Preference	1x non-participating	2x+ or participating
Anti-Dilution	Broad-based weighted average	Full ratchet
Board at Seed	Founder majority or balanced	Investor majority
Option Pool	10-15%	20%+ from pre-money
No-Shop Period	30-45 days	60+ days
Founder Vesting	Credit for time served	Full 4-year restart

What to Do Next

1. Don't sign immediately. Take the time you're given to review carefully.
2. Talk to your lawyer. This 15-minute review gives you context, but you need professional advice.
3. Ask questions. Good investors expect you to negotiate. It's a sign you understand your business.
4. Compare to market. Use tools like our Term Sheet Checker to see how your terms compare to current market standards.

The Bottom Line

A term sheet isn't just a financial document—it's the foundation of your relationship with your investor for the next 7-10 years. Take the time to understand it, ask good questions, and negotiate the terms that matter most to your situation.

Remember: The goal isn't to "win" every term. It's to build a relationship of trust with an investor who will support your company through the inevitable ups and downs.