Term sheet analysis

Term Sheet Analysis

Analyze and compare term sheets from multiple investors. Deconstruct each clause's economic and control impact, model real-world outcomes under different exit scenarios, and support the negotiation. Goal: the CEO understands exactly what they're signing up for.

Purpose

A term sheet is a binding commitment dressed in non-binding language — once accepted, the economics and control dynamics are locked in for the life of the company. Founders who sign without understanding liquidation preferences, anti-dilution mechanics, or board composition often discover painful surprises at exit. This skill makes every term transparent and models what they actually mean at different exit values.

When to Use

• "Analyze this term sheet"
• "Compare these term sheets"
• "What does this liquidation preference mean?"
• "Which term sheet is better?"
• "Model the economic outcome of these terms"
• "Explain the board and control provisions"

Inputs Required

1. Term sheets from investors — full document with all economic and control terms.
2. Current cap table — from cap-table-management.
3. Exit scenario assumptions — range of exit values to model (low, mid, high).

Quick Reference

Economic Term	Normal Range	Red Flag
Liquidation preference	1x non-participating (standard)	>1x, participating, cumulative dividends
Anti-dilution	Weighted average, broad-based	Full ratchet
Dividends	None (for startups)	Cumulative > 8%
Option pool	10-20% post-Series A	Pre-money + oversized = hidden price cut
Control Term	Normal	Red Flag
Board composition	Balanced (2 founders, 2 investors, 1 independent)	Investor majority
Protective provisions	Approval for sale, new financing, amend charter	Approval for budget, hiring, contracts over $X
Exclusivity / no-shop	30-45 days	> 60 days

Procedure

1. Term Sheet Decomposition

For each term sheet, extract and standardize all terms into a comparison table.

2. Economic Modeling Under Exit Scenarios

Model what everyone gets paid at different exit values:

Scenario: $50M exit

	Term Sheet A (1x non-part., 12% ownership)	Term Sheet B (1x part., 15% ownership)
Liquidation preference	$12M	$12M
Participation (remaining)	— ($50M - $12M) × 12% = $4.56M	$12M + ($50M - $12M) × 15% = $17.7M
Total to investor	$4.56M	$17.7M
Total to common/founders/employees	$45.44M	$32.3M

Scenario: $200M exit

	Term Sheet A	Term Sheet B
Investor prefers non-part.	Converts to common: 12% × $200M = $24M	Converts to common: 15% × $200M = $30M
Common gets	$176M	$170M

3. Effective Valuation (Real Price)

The headline pre-money valuation can be misleading. Calculate the effective pre-money:

Effective pre-money = (Pre-money × Post-money shares existing holders) / Post-money shares total

Adjust for:

• Option pool: if the pool increase comes from pre-money, the dilution hits existing holders, not new investors. This is a hidden price reduction.
• Liquidation preference overhang: a 2x liquidation preference makes that $10M investment feel like a $20M "debt" before common gets anything.

4. Recommendation

Score each term sheet on:

1. Economics (the money outcome)
2. Control (who makes decisions)
3. Partner quality (who's the person on the other side)
4. Certainty of close (how likely this closes)

Present a clear recommendation: "Term sheet A is better economically at exits below $80M. Term sheet B is better above $120M. Given our likely exit range of $80-150M, we recommend A."

Key Terms to Analyze

Economic Terms

Term	What it Means	Normal Range	Red Flag
Valuation (pre-money)	Value of the company before the new investment	Varies by stage	—
Amount raised	Total new capital	—	—
Liquidation preference	Who gets paid first in an exit	1x non-participating (standard)	>1x, participating, cumulative dividends
Participation	Can the investor "double dip"?	No (non-participating)	Yes = participating preferred
Dividends	Accruing payments on preferred stock	None (for startups)	Cumulative > 8%
Anti-dilution	Price protection for investors	Weighted average, broad-based	Full ratchet
Redemption rights	Can investors force the company to buy back their shares?	None or > 5 years	< 5 years
Option pool	Shares reserved for employee grants	10-20% post-Series A	If the pool is pre-money and oversized — it's a way to lower the effective valuation

Control Terms

Term	Normal	Red Flag
Board composition	Balanced: 2 founders, 2 investors, 1 independent	Investor majority
Protective provisions	Standard: approval for sale, new financing, amend charter	Approval for budget, hiring, contracts over $X
Drag-along rights	Standard, majority vote	Low threshold (< majority)
Founder vesting	Standard 4-year with 1-year cliff, double-trigger acceleration	Immediate acceleration on single trigger, no vesting
Information rights	Quarterly financials, annual budget	Weekly or overly granular
Right of first refusal / co-sale	Standard	—
Pro-rata rights	Standard for lead investor	Also extends to "major investors" broadly
Exclusivity / no-shop	30-45 days	> 60 days
Legal fee cap	Company pays investor counsel up to $X	Uncapped

Output Format

• Term sheet comparison table (Markdown)
• Waterfall analysis for 3-5 exit scenarios
• "Red flag" summary — terms outside market norms
• Scorecard and recommendation
• Negotiation priorities (what to push back on, what to accept)

Done Criteria

The skill is complete when:

1. All term sheets are decomposed into a standardized comparison table
2. Waterfall analysis shows what each shareholder class receives at 3-5 exit values (low, mid, high)
3. Effective pre-money valuation is calculated (adjusting for option pool and liquidation preference)
4. Each term sheet is scored on economics, control, partner quality, and certainty of close
5. Negotiation priorities are ranked — what to push back on, what to accept
6. Red flags outside market norms are clearly highlighted

Pitfalls

• Focusing only on valuation: a high pre-money with participating preferred or a pre-money option pool increase can be worse than a lower headline with clean terms. Model the economics at actual exit values.
• Ignoring board control: board composition matters more than valuation. A board that can fire the CEO has more impact on the founder's future than an extra $2M in valuation.
• Letting full ratchet anti-dilution through: full ratchet is rare but devastating. It can destroy common stock value in a down round. Fight it hard — weighted average broad-based is the market standard.
• Missing pre-money option pool tricks: a $15M pre-money with a 15% pre-money pool increase is effectively a $12.75M pre-money for existing holders. Always adjust for this.
• Prioritizing terms over partner: the investor partner is more important than the firm name or the terms. A bad partner at a top firm with great terms will make life miserable for 5-10 years.

Verification

Can you answer "which term sheet is better for the company at our likely exit range?" from the analysis? Is the effective pre-money (net of option pool and liquidation preference) calculated for each term sheet? Are red flags highlighted with explanations? Are negotiation priorities ranked with rationale? If not, the analysis is incomplete.

Example

User prompt: "Analyze this term sheet." What should happen: Decompose all economic terms (valuation, liquidation preference, participation, dividends, anti-dilution, option pool) and control terms (board composition, protective provisions, drag-along, vesting, no-shop), model the outcome for common shareholders at 3-5 exit scenarios, calculate the effective pre-money valuation, flag any red-flag terms outside market norms, and provide a scorecard with recommended negotiation priorities.

User prompt: "Compare these term sheets." What should happen: Standardize both term sheets into a side-by-side comparison table, model waterfall outcomes at 3-5 exit values for each, score each on economics, control, partner quality, and certainty of close, highlight key differences, and provide a clear recommendation with rationale for which to accept and what to negotiate.

Linked Skills

• Build financial model to test scenarios → fundraising-financials
• Model dilution impact → cap-table-management
• Track in fundraise pipeline → fundraising-process-management
• Vendor negotiation tactics (transferable skill) → cost-optimization