Economics and control

Two investors offer Northwind Labs $10M at a $50M post-money valuation. The headline is the same. But if Northwind later sells for $20M, one offer gives the founders and the team $10M, and the other offer gives them nothing. The difference is in a short document that many first-time founders read too fast: the term sheet.

What a term sheet is

A term sheet is a short document that lists the primary terms of an investment. The Series Seed term sheet is approximately 2 pages. The July 2020 model term sheet of the National Venture Capital Association (NVCA) is 15 pages. After the two sides sign it, lawyers write the final contracts, which often have more than 100 pages together.

In the US, the term sheet maps onto five standard documents. The lesson on the anatomy of a priced round explains each one:

• The Certificate of Incorporation, also called the charter
• The Stock Purchase Agreement
• The Investors’ Rights Agreement
• The Voting Agreement
• The Right of First Refusal and Co-Sale Agreement.

The NVCA gives free models of these five documents. It updated all five on October 2, 2025. Then it updated the ROFR and Co-Sale Agreement again in April 2026, and the Voting Agreement in June 2026.

Most of a term sheet is not binding

A term sheet is mostly a statement of intent. The NVCA model says that the term sheet “is not a commitment to invest,” so the investor can still stop the deal. But two clauses bind the company at signature, even if the deal never closes:

• The no-shop: for a set number of days, the company does not look for other investors or a buyer.
• Confidentiality: the company does not share the terms, except with a short list of persons.

In Delaware, New York, and the District of Columbia, a “non-binding” term sheet can also cause a legal duty to negotiate in good faith. The Delaware Supreme Court applied this rule in SIGA Technologies v. PharmAthene (2013). Paul Graham gives the practical rule: a deal is not a deal until the money is in the bank. Due diligence can still change the terms or stop the deal. Speak to a lawyer who does venture financings before you sign a term sheet.

Preferred stock: what the investor buys

Founders and employees hold common stock. Venture investors buy preferred stock, a class of shares with more rights. Preferred stock gets its money back first in a sale. It often has vetoes, and protection against a lower price in a later round. Each preferred share can convert into common stock, at first one-for-one.

For example, a Series A investor pays $5.00 for each of 2,000,000 preferred shares, $10M in total. A founder holds 7,000,000 common shares that cost $0.0001 each. The investor pays a much higher price for each share. In return, the investor gets the rights that the term sheet lists.

Two questions: economics and control

Brad Feld and Jason Mendelson wrote Venture Deals, a standard book on term sheets (4th edition, 2019). They write that only two things matter in a term sheet negotiation: economics and control. This economics and control split gives you two questions to ask of each clause:

• Economics: Who gets how much money when a buyer purchases the company, or when the company goes public?
• Control: Who makes the decisions, and who can stop them?

The book puts the remaining clauses in a third group, “other terms.” Most of them are standard, and founders do not often negotiate them. The table gives examples from the three groups in the book:

Economics	Control	Other terms
Price and valuation	Board of directors	Information rights
Option pool	Protective provisions (vetoes)	Registration rights
Liquidation preference and participation	Drag-along	No-shop
Anti-dilution	Conversion	Dividends and redemption
Founder vesting		Right of first refusal and co-sale
Pay-to-play		Voting rights

Two placements are not what many readers think. The book puts founder vesting with the economics, because vesting decides how many shares a founder keeps after the founder leaves. And it puts voting rights with the other terms, not with control.

Economics: the same valuation, a different payout

Look again at Northwind’s two offers. Each investor puts in $10M at a $50M post-money valuation, so each owns 20% of the company as converted. The difference is the liquidation preference:

• Offer A has a 1x preference. In a sale, the investor gets the larger of its $10M back or its 20% share.
• Offer B has a 2x preference. In a sale, the investor gets the larger of $20M or its 20% share.

Predict first

Northwind takes Offer B and later sells for $20M. How much do the common holders get?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

The headline valuation does not show this difference. Two offers at the same price give the founders and the team $10M or nothing. The lesson on liquidation preferences teaches each type of preference.

Control: the same money, a different boss

Now change the example. The two offers have the same economics, but the board is different:

• Offer A gives the investor 1 of 3 board seats.
• Offer B gives the investor 2 of 3 board seats and a veto on the annual budget.

The board of directors can hire and fire the CEO. With Offer B, the investors control the board, and they can replace Ada as CEO. No number in the deal changed, but the founders lost control of their company. The lesson on control terms covers boards and vetoes.

Sort the clauses

Use the two questions on clauses from term sheets. The widget gives you one clause at a time. After each choice, it tells you where Venture Deals puts the clause and why.

Sort the terms

Economics, control, or other?

For each clause, ask one question: does it change who gets the money, or who makes the decisions?

Sorted

0 of 13

Correct

0

Nothing sorted yet

Clause 1 of 13

Pre-money valuation

“$16,000,000 pre-money valuation, on a fully diluted basis.”

EconomicsControlOther terms

Economics · Who gets the money

No clauses yet

Control · Who makes the decisions

No clauses yet

Other terms · Mostly standard

No clauses yet

Economics terms change how the money divides in a sale. Control terms change who can make or stop a decision. Everything else is mostly standard.

What a clean term sheet looks like in 2025-2026

A term sheet is clean when its terms are close to the market standard. The law firms Cooley and Wilson Sonsini publish how often each term appears in the deals that their lawyers do. Their data shows how standard the clean terms are:

A term outside this set is a signal. It tells you how the investor sees the risk of your company. The lesson on reading a term sheet shows a full clean seed term sheet and its red flags.

Where to put your effort

Most clauses are standard, and a fight over each one costs time and trust. The law firm McCarter & English gives this advice:

• Negotiate hard on the price, the liquidation preference, and the board.
• Accept the standard registration rights, information rights, and management rights letter.

The lesson on control terms explains each of these clauses.

Y Combinator (YC) adds two rules. First, get a clean deal, not a perfect deal. Second, if the words of an investor and the terms of the investor do not agree, believe the terms.

Practice

Work it out

An investor offers $8M for 20% of the company, with a 1.5x non-participating preference. The company later sells for $30M. How much do the common holders get?

Your answerCheck

Work it out

An investor puts in $5M for 25% with a 1x non-participating preference. The company sells for $40M. How much does the investor get?

Your answerCheck

Quiz · question 1 of 6

Test what you learned

Which clauses of a term sheet are usually binding when you sign it?

• ANone, because a term sheet is not binding
• BThe no-shop and confidentiality
• CThe board seats
• DThe valuation and the liquidation preference