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Investor Term Sheet Negotiation Checklist
Send the draft term sheet, the charter and the cap table, and get each term priced against your model and your own precedent.
A term sheet negotiation checklist is a list of terms with a note on what each one means. Liquidation preference, anti-dilution, protective provisions, board composition, drag-along, and a sentence of definition each. Read the top forty results for this query and they agree on the list and stop there. None of them prices a single term, which means none of them can tell you whether the concession you are about to make is the cheap one or the expensive one.
Ravelin Systems is an invented Series A. Six million on a 24.0m pre-money against 8,000,000 shares outstanding is 3.00 a share, 2,000,000 new shares and 20.000 percent of the company. The founders counter at 30.0m pre-money, which is 3.75 a share, 1,600,000 shares and 16.667 percent. That is a 25 percent valuation move, and in the room it reads like the whole negotiation. At a 60.0m exit it costs the investor 2.0m of proceeds.
Now price a term instead. Accept the 30.0m and take participating rather than non-participating preferred, and proceeds at that same 60.0m exit go from 10.0m to 15.0m. One term is worth 2.5 times the entire valuation concession. The two structures also cross at exactly 150.0m of exit value, above which the lower valuation wins again. That crossover number is the whole negotiation, and no checklist on page one computes it or even mentions that it exists.
The economic terms do not exist until they are in the charter
A term sheet is mostly non-binding, so the document that matters is the amended certificate of incorporation. Delaware is explicit: a class or series may carry preferences and relative, participating, optional or other special rights only as stated and expressed in the certificate of incorporation. The review therefore checks the drafted terms against the existing charter and names each amendment the deal requires, because a participation right nobody wrote into the charter is a right nobody has.
The control terms have the same character and a different failure mode. Protective provisions work because the holders of the outstanding shares of a class are entitled to vote as a class on a proposed amendment to the charter, so a class vote is the mechanism a veto is built from. Which means a protective provision list is only as strong as the class definition it attaches to, and a later series folded into the same class quietly dilutes the veto.
The third check is against your own record rather than the market's. Of 23 terms in the Ravelin draft, 19 match what this fund has taken in eleven prior Series A rounds and four deviate. Three of the four favour the investor and one favours the company. That register is what makes a negotiating position consistent, and it is the answer when a founder asks whether you do this to everyone. Market standard is a survey. Your own precedent is a fact.
How it works
Send the draft
The term sheet as written, plus the existing charter and the cap table it sits on.
Price each term
Proceeds computed at several exit values under each structure being discussed, side by side.
Find the crossover
The exit value where two structures are equal, so the trade is stated rather than assumed.
Check the precedent
Every term against your prior rounds, with deviations flagged and their direction stated.
What you get
- Each term priced in proceeds at several exit values, not described in a definition
- The crossover exit value where two proposed structures produce the same outcome
- Every drafted term checked against the terms this fund has actually taken before
- Every charter amendment the deal requires, named term by term against the existing charter
- Control terms traced to the class vote they depend on, with the class definition checked
- A concession order, cheapest first, each one priced against your own return model
Common questions
Does this give me legal advice on the terms?
No. It computes what each term does to your proceeds and flags where the draft departs from your own precedent and from the existing charter. Whether a provision is enforceable, how it should be drafted and what the charter amendment must say are counsel's work, and counsel papers the deal. This is the analysis you bring to that conversation.
Why price terms at several exit values instead of one?
Because a term's value depends entirely on where the company ends up, and structures that look ranked at one exit reverse at another. Participating preferred at 30.0m pre-money beats non-participating at 24.0m below a 150.0m exit and loses above it. One exit assumption hides that completely, and it is the only thing worth knowing.
What does checking against our own prior deals add?
Consistency you can defend and a negotiating position that survives contact. Eleven prior rounds all at 1x non-participating is a fact about your fund, and a draft carrying a 1.5x preference is a deviation from all eleven rather than from an abstract market. It also catches drift, which is how a fund's terms move without anyone deciding they should.
Where does the ownership arithmetic come from?
The cap table, including the option pool, and it has to be the real one rather than the summary. Pool expansion pre-money changes the price per share and therefore every figure downstream. Where the preference stack itself is the question, cap table and waterfall analysis works the distribution directly across a full set of scenarios.
Does it help on the following side of a round?
Yes, and the questions change. Following a lead means the terms are largely set, so the useful output is what each one does to your position and which of them you can still ask about. The precedent check matters more there, because a term you have never taken is easier to accept when somebody else negotiated it.
What if we are competing with another term sheet?
Then the crossover arithmetic is the argument. A higher headline valuation with participating preferred and a 1.5x preference is not obviously better for the founders than a lower one that is clean, and the exit value where the two swap places is computable. Presenting that honestly is a stronger position than presenting a bigger number.
How does this connect to the rest of the diligence?
Structure comes after the decision to invest and before the papers. The investment memo pack carries the case and the committee record, the deal screening pack is upstream of both, and a 409A and valuation report review is what reads the appraisal afterwards.
Investor Term Sheet Negotiation Checklist
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