Term Sheet Clause Explainer
Explains a common startup term sheet clause in plain language
About this generator
Pick one of five clauses — Valuation & option pool, Liquidation preference, Anti-dilution, Board composition, or Vesting — and the tool returns a plain-language explanation of what it means, why the specific variation matters (participating versus non-participating, broad-based versus full-ratchet), and a prompt to ask how the term affects founders in both a good exit and a bad one. First-time founders use it to walk into a fundraise understanding what they are signing; anyone learning venture financing uses it to demystify the jargon. A single clause can dramatically change what founders retain in an exit. Use the explainer to grasp the concept and the questions to ask, then have a startup lawyer review the actual document.
How to use
- Select the term sheet clause.
- Click Generate to read a plain-language explainer.
- Note the questions it suggests asking.
- Have a startup lawyer review the real document.
Use Cases
- •Understanding a term sheet before a fundraise
- •Learning venture financing jargon
- •Preparing questions for an investor negotiation
- •Demystifying founder-versus-investor terms
- •Teaching startup finance basics
Tips
- →Always ask how a term behaves in a bad exit, not just a good one.
- →Watch where the option pool is created — it affects dilution.
- →Prefer 1x non-participating liquidation preferences.
- →Engage a lawyer for any real term sheet.
FAQ
Is this legal advice?
No. It is a plain-language educational explainer to help you understand what clauses mean and which variations matter. Always have a qualified startup lawyer review a real term sheet before you sign anything.
Which term sheet clauses does the tool cover?
Five: Valuation & option pool, Liquidation preference, Anti-dilution, Board composition, and Vesting. Each explanation covers what the clause means, why the variation matters (e.g. participating vs non-participating, broad-based vs full-ratchet), and the key question founders should ask.
Why do these clauses matter so much?
Term sheet clauses set control and economics for years. A single term — like a participating liquidation preference or full-ratchet anti-dilution — can dramatically change what founders keep in an exit, so understanding them is real negotiating leverage.
Which clause should founders scrutinise most carefully?
Liquidation preference, anti-dilution, and board composition most often shift control and payouts toward investors. Understand how each behaves in both a good exit and a bad one — the tool's 'what to ask' prompt targets exactly this question.
What is the option pool shuffle?
If the option pool is created pre-money, it comes out of the founders' stake before the investor's ownership is calculated — effectively diluting founders, not the new investor. The Valuation & option pool explanation covers this directly. It is one of the most commonly misunderstood terms in an early-stage term sheet.
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