📄 The Series A Term Sheet

🎉 Happy Friday, funds family!

The Series A (or sometimes the Seed) is typically the first 📄 institutional priced equity round a startup raises. It's an important milestone for the companies and the investors backing them, because the terms negotiated here (e.g., valuation, governance, economic protections, and investor rights) set the framework that will govern the company's relationship with its institutional investors for years, and that framework carries forward into subsequent rounds.

The short answer is: a term sheet is a non-binding summary of the proposed deal terms that serves as the starting point for negotiation and the roadmap for the definitive documents. The key areas are (1) valuation and dilution, (2) governance and control, (3) economic protections for investors, and (4) ongoing investor rights. Understanding what is market, and what is not, is essential for negotiating the term sheet.

➡️ What are the key economic and valuation terms?

The core economic terms of a Series A term sheet include:

• Pre-money valuation: the agreed value of the company before the new investment comes in.

• Investment amount and post-money valuation: the agreed value of the company incorporating the investment coming in and how much total the company is raising.

• Price per share: derived from the pre-money valuation divided by 📄 fully diluted shares outstanding (including the option pool and increases thereto, typically).

• Option pool: the size of the unissued option pool as a percentage of post-closing fully diluted capitalization and, critically, whether the pool refresh is priced pre-money or post-money. For investors reading this, you should almost always push for the pool refresh to be pre-money so that you are not diluted by it. That is market standard.

• Liquidation preference: typically 1x non-participating; anything else warrants scrutiny and specific negotiation.

• Anti-dilution protection: typically broad-based weighted-average.

• Dividends: non-cumulative preferred dividends are standard; cumulative dividends are unusual and heavily investor-favorable.

➡️ What are the governance terms?

Governance terms define how the company is controlled and on what issues investors have veto rights:

• Board composition: boards can vary significantly, but a typical Series A board may look something like this. Five members: two investor seats, two founder/management seats, and one independent director mutually agreed by both sides. Board composition is a meaningful negotiating point, specifically with respect to whether the company’s founders / leaders retain majority control of the board.

• Protective provisions: class-level veto rights held by preferred stockholders over major company actions (discussed in Article 10 📄 Preferred Stock Terms ).

• Drag-along: a provision requiring certain minority holders to vote in favor of an approved acquisition if a defined majority agrees to it. This is important for ensuring a deal can close without a minority blocking it, and what type of approval or blocking right investors have in that regard.

• Founder restrictions: founders may be required to enter into non-compete, non-solicit, vesting rearrangements, and/or transfer restriction agreements as conditions of the financing.

➡️ What investor rights are typically included?

In addition to governance rights, investors typically negotiate for:

• Information rights: the right to receive quarterly and annual financial statements, and sometimes board packages, budgets, and cap table updates.

• Pro rata rights: the right to invest in future rounds to maintain ownership percentage (there are numerous variations of this, which we will cover in a subsequent newsletter).

• Right of first refusal (ROFR): the right to purchase shares (typically the founders’ shares) before they are transferred to a third party.

• Co-sale rights (tag-along): the right to participate in any founder share sale to a third party on the same terms.

• Registration rights: for larger rounds, the right to participate in or require an IPO registration of shares.

These rights are documented across the definitive deal package: the Stock Purchase Agreement, the Certificate of Incorporation (aka the Charter), the Investors' Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement.

➡️ So what is market versus aggressive?

A few reference points for evaluating term sheet terms:

• 1x non-participating liquidation preference: market standard.

• Participating preferred or 2x+ liquidation preference: non-market and aggressive in favor of investors.

• Broad-based weighted-average anti-dilution: market standard.

• Full ratchet anti-dilution: non-market and highly punitive for the company.

• Split board with independent director: market for institutional Series A, though the board control and composition can vary a lot.

• Quarterly financial information rights and annual audited financials: market for Series A.

• Option pool and refresh: to be included as pre-money.

• Redemption rights (the right to force share repurchase): rare in US venture and generally unfavorable for companies. Almost never see it.

➡️ The practical takeaway

For the company:

1. Read every term in the term sheet before signing, and model the cap table and waterfall at the proposed terms before agreeing to valuation and pool size.

2. The option pool timing is a significant economic point: a pre-money pool increase dilutes the founders before the new investor comes in; model both scenarios. Investors will want it to be pre-money and that’s fairly market.

3. Governance rights are not just administrative. A board with investor veto rights and protective provisions is a meaningful constraint on future flexibility.

4. Use a venture-experienced attorney; this is not the right context for general practice counsel.

For the investor:

1. Confirm that the terms are market-standard; outlier provisions can create friction at the next institutional round.

2. Information rights are your primary window into the company post-close, so make sure they are specific and enforceable, not aspirational language.

3. Pro rata rights may be your most valuable long-term right in the deal: the ability to maintain or increase ownership at subsequent rounds is where much of the return is built.

4. Make sure that certain items such as (option pool and refresh) are included as pre-money and that promised options are included as pre-money as well.

5. Understand what the drag-along requires: who needs to consent, what thresholds apply, and whether they work in practice for the exit scenarios you anticipate. You need to understand the mechanics.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.