Fundraising · Lesson 2 · 18 min
Reading your first term sheet
A clause-by-clause read of a real seed term sheet — liquidation preference, anti-dilution, pro-rata, board — and which lines are standard versus which should make you pause.
A term sheet is mostly about two things
Founders fixate on the valuation. But the two terms that quietly decide your outcome are the liquidation preference (who gets paid first, and how much) and anti-dilution (what happens if you raise the next round lower). A higher valuation with an ugly preference can be worse than a lower one that’s clean.
1× non-participating is the clean default
A 1× non-participating preference means the investor takes the better of: their money back, or converting to common and taking their ownership share — not both. That’s standard and founder-fair.
Participating (“double dip”) means they take their money back and a pro-rata share of the rest. On a modest exit that can leave founders with far less than their ownership suggests. Push back on it.
The rest of the standard terms
Pro-rata (the right to keep their % in future rounds) is normal. A board seat at seed is common but think about control. The option-pool shuffle (creating the ESOP pool pre-money) dilutes you, not them — you met it in the cap-table lesson. Know which lines are standard so you spend your negotiating capital on the ones that matter.
See it for yourself
Set an exit value and an investor’s terms, then toggle participating on and off. Watch the split move. When it looks like your real situation, keep it — it’s saved to your cap table’s exit model.
Who gets paid at exit?
At ₹200,000,000, the investor takes its preference — and a 1× non-participating investor takes the better of preference or converting.