Founders & Small BusinessFree
Term Sheet Explainer and Payout Model
Every clause in plain language, which terms are off market, and what your own shares are worth at several exit values under these exact terms.
River's term sheet explainer reads the document you were sent and tells you what it does, not just what it says. Every clause comes back in plain language with a note on whether it sits inside normal market terms or outside them. Alongside that, the economics get modelled against your cap table, so you can see what your own stake pays out at a weak exit, an expected one and a strong one, under these exact terms rather than in general.
Unlike the term sheet guides that rank for this search, this does not stop at defining vocabulary. Those explain what a liquidation preference is and tell you that one times non-participating is standard, which is true and still leaves you unable to answer the only question that matters: what does this pay me. A definition cannot be checked against your cap table. A waterfall can. The deck that got you here is a separate job: the pitch deck writer builds one, and reading one from the investor's seat is another.
This is for first-time founders holding their first priced term sheet, second-time founders who want the economics modelled before the partner call, and operators joining a company who need to understand what the existing preference stack means for their equity. Use it the day the document arrives, before you agree to anything on a call. Once the round closes, the investor update email starts the reporting rhythm your new board will expect.
Standard terms are not the same as harmless terms
The advice every founder receives is that a one times non-participating liquidation preference is standard, and it is. What it leaves out is that standard describes how common a term is, not what it costs you. The cost depends on where the company exits relative to the size of the round. The same clause is invisible at a strong exit and decisive at a weak one. A founder told the preference is fine, who has not run the number for their own cap table at a weak exit, has been reassured about the wrong thing.
Run it once and it stops being abstract. Take a $5m investment at $20m pre-money, so $25m post and the investor holds 20%. Under a one times non-participating preference they take the $5m back or their 20%, whichever is larger. They are equal at exactly $25m. Sell for $15m and they take the $5m, leaving $10m for common. Sell for $50m and they convert to $10m, leaving $40m. Make the same preference participating and they take both: $7m at a $15m exit, dropping common to $8m, and $14m at $50m, dropping common to $36m.
One more thing worth knowing before you negotiate: the term sheet is mostly a summary, and the language that binds you gets written somewhere else. The preference you agree to in a two-page document is legally defined in the certificate of incorporation. The industry versions of that document, and of the four others your round is papered on, are published free as the NVCA model legal documents. Reading the model certificate of incorporation next to your term sheet is the cheapest way to see what the summary commits you to.
How it works
Paste the term sheet
The full text as written, plus a line on what your cap table looks like today.
River models the terms
Each clause explained and benchmarked, then the economics run against your actual ownership.
Get the explainer
A document covering every clause, and a sheet showing your proceeds across a range of exits.
Pressure test in chat
Ask what changes if the pool moves post-money, or if the preference goes to two times.
What you get
- Every clause translated into what it does in practice, not a glossary definition
- Each term marked as inside normal market range, aggressive, or unusual enough to question
- Your ownership after the round, with the option pool applied where the term sheet actually puts it
- Proceeds to you modelled at several exit values under this preference, not a generic one
- The control terms read together, since board seats and protective provisions compound
- The three terms most worth negotiating on this specific sheet, with the reason each was chosen
Common questions
Is a term sheet binding?
Mostly not, with important exceptions. The economic and control terms are proposals that get written into the definitive documents later. Confidentiality and the no-shop or exclusivity clause usually do bind from signature, which means signing stops you talking to other investors for whatever period it names. Read the length of that period before anything else, since its end date is nowhere in the document.
Can this replace a startup lawyer?
No, and it is not trying to. What it does is make you a well-prepared client, so the hour you buy from a lawyer is spent on judgement rather than on explaining what the clauses mean. Arriving with the economics already modelled and three specific questions is a materially better use of that hour.
Where does the option pool actually hit me?
It depends on one word in the term sheet. A pool created pre-money comes out of the existing shareholders, which is you, before the investor's percentage is calculated. Created post-money it dilutes everyone including the new investor. The headline valuation looks identical either way, and the difference in your final ownership is real.
What counts as an off-market term?
Anything that stacks in one direction. A preference above one times, participation with no cap, full ratchet anti-dilution, or protective provisions that reach into ordinary operating decisions. Any one of these appears in real deals for real reasons. Several together on the same sheet is the pattern worth pushing back on. Once that pushback becomes rounds of tracked changes, a redline read across rounds shows whether they moved.
Do I need the whole cap table to get useful output?
No. Rough founder percentages, the option pool, and any SAFEs or notes with their caps are enough for a waterfall that is directionally right. Precision matters more as the stack grows, and past three or four instruments it is worth running the SAFE and note conversion model first, since stacked caps add rather than dilute each other.
What if I have two term sheets?
Run each one and compare the waterfalls rather than the headline valuations, because the higher valuation is regularly the worse deal once preferences and pool placement are applied. Then bring both sets of numbers to the conversation. If equity grants to advisors are part of the picture, the advisor equity letter covers that side.
Term Sheet Explainer and Payout Model
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