Valuation is the easy number

Founders spend most of a raise negotiating the pre-money valuation, and for good reason: it is the number the market talks about. It is also the number least likely to decide who runs the company in three years. Control sits in a handful of clauses that are usually settled late, in the long-form documents, when everyone is tired and the money is nearly in the bank.

The term sheet is where those clauses should be fixed. Most are described in a line or two, and most are called “market standard”. Some are. Others are standard for one fund’s template rather than for the market, and the difference is worth knowing before you sign.

Board composition

A single investor nominee on a three-person board is ordinary. Two nominees, or an “independent” director who must be approved by the investor, changes the arithmetic. Look at who appoints the chair, whether the chair has a casting vote, and what happens to the board in the next round. Control rarely moves in one step; it moves across two or three raises that each look reasonable on their own.

Protective provisions

Investor consent rights — reserved matters, or vetoes — protect a minority investor from being diluted or bypassed. A reasonable list covers changes to share rights, new share issues, a sale of the business and material related-party transactions. A long list reaching budgets, hiring above a salary threshold or ordinary trading contracts transfers operational control, whatever the shareholding says.

Ask for a materiality threshold, a sunset on items that only make sense while the investor is the largest holder, and a requirement that consent not be unreasonably withheld.

Liquidation preference and anti-dilution

A one-times non-participating preference returns the investor’s money first and then converts to ordinary shares if that is worth more. Participating preferences, multiples above one and cumulative dividends change the outcome of every exit below a very high price. Full-ratchet anti-dilution does the same in a down round. None of these affect day-to-day control, but they decide who can afford to say no to a sale.

Drag-along and leaver provisions

A drag-along lets a majority force a sale on the minority. The threshold, and whether the investor can trigger it alone, determines whether founders can block an exit they believe is too early. Leaver provisions decide what a founder keeps if they leave, are asked to leave, or are removed. A “bad leaver” definition that includes termination without cause is the most direct transfer of control in any term sheet, and it is often buried in the vesting paragraph.

What we look at first

When a founder sends us a term sheet, we read it in a set order: board and chair, reserved matters, drag thresholds, leaver definitions, then the economics. We model the three most likely exits, including a disappointing one, and show who decides at each. That usually produces a short list of points worth negotiating and a longer list worth leaving alone.

Investors expect negotiation on these terms. Raising them at the term sheet, rather than in the long-form documents, is quicker, cheaper and considerably less awkward for everyone.