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

1. One-line summary (economics in one sentence)
2. Liquidation stack (who gets paid first, in what order)
3. Waterfall model (who gets paid at $10m, $30m, $100m, $500m exits)
4. One-page term summary (economics + control + unusual terms)
5. Red flags list (ranked, max 5)
6. 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):

1. Later rounds (Series B) - often pari passu or senior
2. Earlier preferred rounds (Series A, Seed)
3. Converted SAFEs/notes (often pari passu with the round they convert into)
4. 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.