Understanding Term Sheets
A Plain-English Guide

A term sheet is a non-binding document that outlines the key terms of a proposed investment in your company. Think of it as a handshake on paper -- it says "here's what we're agreeing to in principle" before the lawyers turn it into legally binding documents.

The term sheet itself is not the deal. It's the framework for the deal. The actual legal agreements (stock purchase agreement, investor rights agreement, voting agreement, right of first refusal) come later and can take 4-8 weeks to finalize.

Here's what most first-time founders in Miami and everywhere else get wrong: they focus exclusively on the valuation number and treat everything else as boilerplate. That's like buying a house based on the price without reading the inspection report. The non-valuation terms in a term sheet can matter more than the headline number, especially in downside scenarios.

This guide walks you through every term that matters, in the order you'll encounter them.

This is the number everyone fixates on. Let's make it crystal clear.

Pre-money valuation is what your company is worth before the new money comes in. Post-money valuation is pre-money plus the investment amount.

The math: If an investor offers $1M at a $4M pre-money valuation, your post-money valuation is $5M. The investor gets 20% ($1M / $5M). You keep 80%.

Same investor, same $1M, but at a $4M post-money valuation? Now the investor gets 25% ($1M / $4M). You keep 75%. That single word -- pre vs post -- just cost you 5% of your company.

Always clarify whether a valuation is pre-money or post-money. If someone says "we'll invest at a $5M valuation" without specifying, ask. It's not a dumb question. It's a $250K+ question.

What's negotiable: The valuation itself is entirely negotiable. It's determined by market conditions, your traction, competitive offers, and the investor's appetite. There's no formula -- it's a negotiation.

What to watch for: Investors who insist on post-money valuation language (increasingly common with SAFEs) without explaining the difference. Also watch for "fully diluted" language, which includes the option pool in the calculation and can significantly reduce your effective ownership.

Every time you raise money, your ownership percentage decreases. This is dilution, and it's not inherently bad -- the goal is to own a smaller percentage of a much bigger pie.

Here's a realistic dilution path for a startup that raises multiple rounds:

Founding: You own 100%. After co-founder and option pool: ~60%. After seed round: ~48%. After Series A: ~33%. After Series B: ~25%.

If the company is worth $100M at Series B, your 25% is worth $25M. If you'd bootstrapped and owned 100% of a $2M company, you'd have $2M. Dilution isn't the enemy. Bad dilution is.

Bad dilution happens when you give up equity at a low valuation, with aggressive terms, or to investors who don't add value. That's why every term in this article matters -- not just the valuation.

This is the term that matters most in a bad outcome -- and statistically, most startups have bad outcomes. Liquidation preference determines who gets paid first (and how much) when the company is sold or shut down.

1x non-participating preferred. This is standard and fair. It means: the investor gets their money back first. After that, the remaining proceeds are split according to ownership percentages. The investor chooses whichever is higher -- their 1x return or their pro-rata share.

Example: Investor put in $1M for 20%. Company sells for $3M. Option 1: investor takes $1M (1x preference). Option 2: investor takes 20% of $3M = $600K. Investor chooses Option 1, getting $1M. You get $2M.

1x participating preferred. This is more aggressive. The investor gets their $1M back first AND then participates in the remaining $2M at their ownership percentage. So: $1M + (20% x $2M) = $1.4M. You get $1.6M. See the difference?

2x or 3x liquidation preference. This is where it gets ugly. With a 2x preference, the investor gets $2M back before you see a penny. On a $3M exit, you'd only get $1M out of a company you built. We've seen term sheets like this from investors in Miami and beyond -- always push back.

The rule of thumb: 1x non-participating is standard and acceptable. Anything else needs a very good reason and should come with a higher valuation to compensate.

Anti-dilution protects investors if you raise a future round at a lower valuation (a "down round"). There are two types:

Weighted average (standard and fair). This adjusts the investor's conversion price based on the size and price of the down round. The bigger the down round relative to the company, the more protection. But it's proportional and reasonable.

Full ratchet (aggressive). This reprices the investor's entire investment to the lower price, regardless of how small the down round is. If you raised at $10/share and later sell one share at $5, the investor's entire position gets repriced to $5. This can be devastating to founders.

What to negotiate: Always push for broad-based weighted average. Full ratchet is a red flag that the investor is prioritizing their downside protection over your ability to operate. If an investor insists on full ratchet, consider whether they're the right partner.

The board of directors has real power: they can fire you (yes, even from your own company), approve or block major decisions, and influence the company's direction. Board composition matters enormously.

Seed stage: The most founder-friendly structure is a 3-person board: 2 founder seats, 1 investor seat. Or no formal board at all (just advisory).

Series A: Typically 5 seats: 2 founders, 2 investors, 1 independent. The independent member is theoretically neutral but in practice often leans toward whoever recruited them.

What to negotiate: Maintain board control as long as possible. Once investors have a board majority, they can replace you as CEO, block pivots, or force a sale you disagree with. This is especially important for founders who want to build long-term companies rather than optimize for a quick exit.

Protective provisions are the related term. These are veto rights that let investors block specific actions even without board control -- things like raising more money, selling the company, changing the bylaws, or increasing the option pool. Some are reasonable; others give investors too much control. Your lawyer should review each one.

Vesting ensures that founders (and employees) earn their equity over time rather than getting it all upfront. The standard is 4-year vesting with a 1-year cliff.

4-year vesting: Your equity vests monthly over 4 years. After 4 years, you've earned 100%.

1-year cliff: No equity vests during the first year. If you leave before the 1-year mark, you get nothing. At the 1-year mark, 25% vests immediately, then monthly after that.

Why it exists: It protects against a co-founder who leaves after 3 months with 50% of the company. It also protects you -- your co-founder's equity is protected by the same mechanism.

What investors will ask for: They'll typically require that founders vest their shares, even if you've been working on the company for a year pre-investment. Negotiate for credit for time already served. If you've been working full-time for 12 months, you should start with 25% vested.

Acceleration clauses: Single-trigger acceleration means all your equity vests immediately if the company is acquired. Double-trigger means you need to be acquired AND terminated. Push for at least double-trigger acceleration to protect yourself in an acquisition.

Pro-rata rights give investors the right to invest in future rounds to maintain their ownership percentage. If they own 20% after your seed round, they can invest enough in your Series A to keep owning 20%. This is standard and generally fine -- it means interested investors can continue supporting you.

Drag-along rights let a majority of shareholders force minority shareholders to join a sale. If 70% of shareholders want to sell the company, drag-along means the other 30% have to sell too. This is necessary to prevent small shareholders from blocking a deal, but the threshold matters. Push for a high threshold (like 2/3 or 3/4 of shareholders).

Tag-along rights (co-sale rights) let minority shareholders sell their shares in any transaction where majority shareholders are selling. If a founder wants to sell some of their shares, investors can sell a proportional amount too. This protects investors from founders cashing out while leaving investors stuck.

All three are standard. The devil is in the details -- specifically the thresholds and exceptions.

Not all fundraising involves a full term sheet. Early-stage companies often use simpler instruments:

SAFE (Simple Agreement for Future Equity). Created by Y Combinator, this is the simplest fundraising instrument. No interest rate, no maturity date. You receive money now, and the investor gets equity later when you raise a priced round. The SAFE converts at a discount or cap (whichever is more favorable to the investor). Most pre-seed and seed rounds in Miami and Silicon Valley use SAFEs now.

Convertible note. This is technically debt. It has an interest rate (typically 2-8%), a maturity date (typically 12-24 months), and converts to equity at a discount or cap when you raise a priced round. If you don't raise before maturity, you technically owe the money back (though this is usually renegotiated). More investor-friendly than a SAFE.

Priced round. This is the full deal -- a formal term sheet with a set valuation, new shares issued, and all the terms we've discussed in this article. Series A and beyond are almost always priced rounds.

Which to use: SAFEs for friends-and-family and pre-seed. Convertible notes if your investors require more structure. Priced rounds for institutional investors at Series A and beyond. Don't do a priced round for a $500K raise -- the legal costs alone ($15K-$30K) will eat a significant chunk.

The short answer: always get a startup lawyer before signing anything. The long answer: you should understand the terms yourself first so you can have an informed conversation with your lawyer.

A good startup lawyer costs $3K-$10K for a seed round and $15K-$30K for a Series A. This is not the place to cut costs. A bad term sheet can cost you millions over the life of your company.

What your lawyer does that you can't: Spots unusual or aggressive terms buried in dense legal language. Benchmarks your terms against market standards. Negotiates on your behalf (investors often accept pushback from lawyers that they wouldn't from founders). Ensures the final legal documents match the term sheet.

What you should understand before calling your lawyer: Everything in this article. If you don't understand the basic concepts, you'll waste expensive lawyer time on education instead of strategy. Your lawyer protects you, but only if you know what you're trying to protect.

1. Optimizing only for valuation. A $6M valuation with 2x participating preferred is worse than a $4M valuation with 1x non-participating in most exit scenarios. Look at the whole picture.

2. Not negotiating. Everything in a term sheet is negotiable. Investors expect you to push back. If you sign the first term sheet without any changes, you're leaving protection on the table.

3. Not understanding the option pool shuffle. Investors often require a 15-20% option pool created before their investment, which effectively lowers your pre-money valuation. If the term sheet says $4M pre-money with a 20% option pool, the effective pre-money for existing shareholders is $3.2M.

4. Signing under time pressure. "This offer expires in 48 hours" is a negotiation tactic. Reasonable investors give you a week or more to review with your lawyer. If they pressure you, that's a signal about how they'll behave as board members.

5. Not considering the alternative. Raising money isn't the only path. Bootstrapping, revenue-based financing, or a venture studio partnership might give you more favorable terms for your specific situation. Don't default to raising VC because it's the glamorous path.

A term sheet is a negotiation, not a take-it-or-leave-it offer. Understanding the terms gives you the power to negotiate from knowledge, not fear.

Remember: the best term sheet is one where both sides feel like they got a fair deal. Investors who push for aggressive terms are investors who don't believe in upside -- they're protecting against downside, which means they're not the partners you want.

If you're a founder in Miami or Latin America navigating your first term sheet and want a second opinion, reach out. We've been on both sides of the table and can help you understand what you're looking at.