Term Sheet Review Checklist for Investors

Review every term sheet carefully before signing. Terms matter more than valuation — bad terms on a good company can still lose money. Use this checklist.

Economic terms: Pre-money valuation, Post-money valuation, Option pool size and refresh, Liquidation preference (1x non-participating is standard), Pro-rata rights for follow-on.

Control terms: Board composition (investor seat?), Protective provisions (veto rights), Information rights (quarterly financials, annual budget), Drag-along and tag-along rights.

Founder terms: Founder vesting (4-year, 1-year cliff standard), Founder lock-up, Non-compete and IP assignment, Right to terminate founders.

Investor-specific: Your ownership %, Board observer rights (if no board seat), Milestone-based tranching (avoid if possible), Anti-dilution (broad-based weighted average is standard).

FAQ

What's the most important term?

Liquidation preference. 1x non-participating is standard and founder-friendly. Participating preferred or >1x preference shifts economics significantly toward investors.

Should I insist on a board seat?

For checks under $1M, usually no — observer rights are enough. For larger checks or lead investor roles, yes. Board seats come with fiduciary duties and time commitments.

What's a red flag in term sheets?

Multiple liquidation preferences, full ratchet anti-dilution, aggressive founder vesting resets, or broad veto rights. These signal either a weak company or an aggressive co-investor.

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