Term sheet triage

When to use

Use this skill when you need to:

Review a term sheet quickly and identify what matters (< 30 minutes for simple, < 2 hours for complex)
Model multi-investor liquidation waterfalls
Explain term implications in plain language to partners or founders
Compare competing term sheets
Advise founders on incoming terms

Inputs you should request (only if missing)

The term sheet text (or key terms if redacted)
Full cap table (all prior rounds, SAFEs, notes, option pool)
Round size and price (or cap/discount if SAFE/note)
All prior liquidation preferences (multiples, participation, seniority)
Desired ownership / board goals (if investor-side)
Founder goals / constraints (if advising founder)

Outputs you must produce

One-line summary (economics in one sentence)
Liquidation stack (who gets paid first, in what order)
Waterfall model (who gets paid at $10m, $30m, $100m, $500m exits)
One-page term summary (economics + control + unusual terms)
Red flags list (ranked, max 5)
Negotiation levers (what to push, what to accept, difficulty rating)

Templates:

assets/term-sheet-checklist.md
assets/scenario-table.md
assets/waterfall-model.md

Procedure

1) One-line economics summary (do this first)

Write one sentence: "$Xm at $Ym pre ($Zm post), Z% ownership to new investors, with [standard/non-standard] prefs."

Examples:

"$3m at $12m pre ($15m post), 20% to Series A, 1x non-participating"
"$500k SAFE at $8m cap, ~5.9% assuming conversion at cap"
"$10m at $40m pre, 20% to Series B, 1x participating with 3x cap"

2) Classify the instrument

Priced equity round (Series Seed, A, B, etc.)
SAFE (post-money or pre-money cap)
Convertible note
Other (revenue-based, etc.)

3) Build the liquidation stack (multi-investor)

Seniority order (typical, but verify):

Later rounds (Series B) - often pari passu or senior
Earlier preferred rounds (Series A, Seed)
Converted SAFEs/notes (often pari passu with the round they convert into)
Common stock (founders, employees)

For each investor class, document: | Class | Investment | Liq pref multiple | Participation | Seniority | Cap on participation | |---|---|---|---|---|---| | Series B | $10m | 1x | Participating | Senior | 3x cap | | Series A | $3m | 1x | Non-participating | Pari passu with Seed | N/A | | Seed | $1.5m | 1x | Non-participating | Junior to B | N/A | | SAFEs | $500k | 1x (converts to Seed) | Non-participating | Converts to Seed | N/A | | Common | N/A | None | Pro rata | Last | N/A |

4) Build the waterfall model

Step-by-step waterfall calculation:

For each exit value ($10m, $30m, $100m, $500m):

Step 1: Pay senior liquidation preferences

Series B gets min(remaining proceeds, $10m × 1x)
If participating: Series B also participates in remaining after Step 2

Step 2: Pay pari passu liquidation preferences

Series A and Seed share remaining proceeds pro rata up to their 1x preferences
Series A: min(remaining × (3m/4.5m), $3m)
Seed: min(remaining × (1.5m/4.5m), $1.5m)

Step 3: Participation (if applicable)

Participating preferred gets their preference PLUS pro rata share of remainder
Non-participating must choose: preference OR convert to common

Step 4: Distribution to common

Whatever remains goes pro rata to common + converted preferred

Waterfall table: | Exit value | Series B | Series A | Seed | Common | Founder % | Notes | |---|---|---|---|---|---|---| | $10m | $10m | $0 | $0 | $0 | 0% | B takes all | | $30m | $14m | $4.8m | $2.4m | $8.8m | 22% | B participating to cap | | $100m | $30m | $21m | $10.5m | $38.5m | 24% | B hits 3x cap | | $500m | $30m | $141m | $70.5m | $258.5m | 32% | All convert, pro rata |

5) Extract economics that matter

For priced rounds: | Term | Value | Standard? | Impact on founders | |---|---|---|---| | Pre-money valuation | | | | | Post-money valuation | | | | | New investor ownership | | | | | Option pool (pre/post) | | >10% post is aggressive | | | Liquidation preference | | 1x is standard | | | Participation | | Non-participating is founder-friendly | | | Participation cap | | 3x is reasonable if participating | | | Anti-dilution | | Broad-based weighted avg is standard | | | Pro-rata rights | | | | | Pay-to-play | | None is standard | |

For SAFEs/notes: | Term | Value | Standard? | Impact | |---|---|---|---| | Cap | | | | | Discount | | 20% is standard | | | MFN | | Yes is standard | | | Interest rate (notes) | | 5-8% is standard | | | Maturity (notes) | | 18-24 months is standard | | | Conversion trigger | | Qualified financing is standard | | | Pro-rata rights | | | |

6) Extract control terms

| Term | Provision | Standard? | What it blocks | |---|---|---|---| | Board composition | | 2 founders + 1 investor + 1 independent is common at A | | | Board observer | | 1 observer is standard | | | Protective provisions | | See standard list below | | | Information rights | | Quarterly financials is standard | | | Drag-along | | Majority preferred + majority common is standard | | | Founder vesting | | 4-year with 1-year cliff is standard | | | Voting agreement | | | |

Standard protective provisions (investor consent required):

Change authorized shares
Create senior or pari passu preferred
Change charter or bylaws materially
Sell or merge the company
Change board size
Declare dividends
Wind down the company

Non-standard protective provisions to flag:

Consent for hiring/firing executives
Consent for budget approval
Consent for contracts over $X
Consent for debt over $X

7) Identify red flags (max 5, ranked)

| Red flag | Why it matters | Severity (1-5) | Negotiable? | |---|---|---|---| | Participating preferred without cap | Double-dips on exit, can take 40%+ of small exits | 5 | Yes - push for cap or non-participating | | >1x liquidation preference | Blocks smaller exits, misaligns incentives | 5 | Yes - push for 1x | | Full ratchet anti-dilution | Punitive in down round, can wipe out founders | 4 | Yes - push for broad-based weighted | | Overly broad protective provisions | Investor can block normal operations | 4 | Yes - narrow scope | | Redemption rights | Forces liquidity event, time bomb | 4 | Yes - remove or extend horizon | | Founder vesting reset | Demotivates founders, often unreasonable | 3 | Yes - push for acceleration | | Aggressive option pool | Dilutes founders pre-money | 3 | Yes - negotiate size | | Side letters with extra rights | Creates conflicts between investors | 3 | Depends |

8) Side letter analysis (often where sharp edges hide)

Common side letter provisions to review: | Provision | Standard? | Impact | |---|---|---| | Super pro-rata | Non-standard | Squeezes other investors in future rounds | | Board seat guarantee | Depends on check size | May conflict with other investors | | Information rights upgrade | Sometimes | Extra reporting burden | | Most favored nation | Standard | If anyone gets better terms, they do too | | Anti-dilution protection upgrade | Non-standard | Better protection than other investors | | Co-sale rights | Standard | Can sell alongside founders | | Veto on specific actions | Non-standard | Extra control |

Side letter red flag: If side letters give one investor materially better terms, other investors will likely demand the same (MFN cascade).

9) Multi-round complexity handling

When comparing multiple term sheets: | Term | Offer A | Offer B | Offer C | Notes | |---|---|---|---|---| | Pre-money | $15m | $12m | $18m | | | Check size | $3m | $4m | $3m | | | Ownership | 16.7% | 25% | 14.3% | | | Liq pref | 1x NP | 1x Part | 1x NP | B has participating | | Board | 2/1/1 | 2/2/0 | 2/1/1 | B wants 2 seats | | Pro-rata | Yes | Super | Yes | B wants super pro-rata |

Effective valuation comparison (factor in option pool, prefs):

Offer A effective value: $Xm
Offer B effective value: $Ym (lower due to participation)
Offer C effective value: $Zm

10) Summary recommendation

One paragraph:

Is this a fair deal?
What are the 1-2 terms worth negotiating?
What should be accepted as-is?
Any deal-breakers?
How does the waterfall look at realistic exit scenarios?

Waterfall model template

Exit value: $___m

STEP 1: Senior preferences
- Series B: min($___m, $___ preference) = $___m
- Remaining: $___m

STEP 2: Pari passu preferences  
- Series A: min($___m × __%, $___ preference) = $___m
- Seed: min($___m × __%, $___ preference) = $___m
- Remaining: $___m

STEP 3: Participation
- Series B (participating): $___m × __% ownership = $___m (capped at $___m)
- Remaining: $___m

STEP 4: Conversion analysis
- Series A as-if-converted: $___m × __% = $___m
- Series A chooses: preference ($___m) vs converted ($___m) = $___m
[Repeat for each non-participating class]

STEP 5: Distribution
- Series A: $___m (___%)
- Seed: $___m (___%)
- Common: $___m (___%)
- Founder take-home: $___m (___%)

Public references

Brad Feld & Jason Mendelson's Venture Deals (liquidation preference mechanics)
HSBC Innovation Banking waterfall guides
Allied VC cap table modeling guides

Salesforce logging (optional)

Attach the term sheet as a File to the Opportunity
Create a Note: "Term summary: [one-line] | Red flags: [list] | Rec: [accept/negotiate/walk]"
Update Opportunity stage to "Term Sheet"
Log waterfall model output in Notes

Edge cases

If terms are incomplete: list missing terms and explain what each missing term could change. Assume standard terms for modeling but flag assumptions.
If there are side letters: treat them as first-class. Model their impact on the waterfall.
If cap table is messy: clean it up first. SAFEs and notes must be modeled with conversion assumptions.
If multiple SAFEs at different caps: model each conversion scenario separately.
If there's a bridge round: model bridge terms and how they interact with the new round.