Funding & Term Sheets

The term sheet — a map of the deal

A term sheet is a non-binding (except for a few clauses) summary of the proposed investment. Understanding its key terms protects founders from costly surprises during definitive documentation.

Valuation: pre-money vs post-money

Pre-money valuation is the company's worth before the new investment; post-money is pre-money plus the new money. The investor's ownership = investment ÷ post-money. Founders must also watch where the ESOP pool is created — if it's carved out of the pre-money, founders bear the dilution.

Liquidation preference and anti-dilution

Liquidation preference decides who gets paid first on an exit. A '1x non-participating' preference is founder-friendly; participating preferences let investors double-dip. Anti-dilution (broad-based weighted average vs full ratchet) protects investors in a down round — full ratchet is harshest on founders.

Control terms

Watch board composition, reserved matters (decisions needing investor consent), drag-along and tag-along rights, and founder vesting. A great valuation paired with onerous control and economic terms can be a worse deal than a modest valuation with clean terms.