Free Cram

Reading a startup term sheet

Valuation, dilution, liquidation preferences and the other terms that actually matter.

Listen with headphones. When it asks a question, answer out loud before it tells you.

Pre-money vs post-money: same headline number, different meaning. Ownership is investment divided by post-money.
Option pool: shares reserved for future hires. If it sits in the pre-money, founders pay for it, so compute the effective pre-money.
Liquidation preference: who is paid first in a sale. Market is one-x non-participating.
Participation: full participating is the double dip, preference back and then a share of the rest. It bites in small and mid exits.
Anti-dilution: broad-based weighted average is the mild market standard. Full ratchet is a red flag.
Pro rata: the investor's right to buy into future rounds to keep its percentage.
Board seats: the board hires and fires the CEO. Count votes and ask who picks the independent.
Protective provisions: investor vetoes at the stockholder level. Keep them to big events, not routine operations.

Fully diluted capitalization: the share count behind the price per share. Check that it includes the expanded pool and any converting SAFEs or notes.
No-shop: a binding exclusivity clause. Once you sign, you lose leverage with other investors.
Founder vesting: shares often re-vest, commonly over four years with a one-year cliff. Ask for credit for time served and for acceleration on a sale.
Drag-along: forces minority holders to join an approved sale. Check who has to approve it.
Cumulative dividends: they make the preference grow over time. This is a red flag. The usual form is non-cumulative, paid only when and if declared.

Pre or post, then the effective pre-money after the pool, and check the fully diluted share count.
One-x non-participating is the market standard. Watch for big multiples, the double dip, and cumulative dividends.
Full ratchet anti-dilution is a red flag.
Count board votes and keep protective provisions to big events, not daily operations.
Negotiate before you sign the no-shop, model the dilution in a cap table tool, and have a startup lawyer review it.

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