The term sheet explained
Economics and control: liquidation preference, anti-dilution, pro rata, board seats and protective provisions, each on its own page.
A term sheet is a few pages that set a priced round's terms before the lawyers write the documents. Its lines fall into two groups: economics (who gets how much money) and control (who decides). Each is a page under this lesson, worked on Northwind's Seed.
The valuation is one line of the term sheet. The preference, the pool and the anti-dilution clause can move more money than it does.
In this lesson: liquidation preference, anti-dilution, pro rata rights, board seats and protective provisions.
Pages in this lesson
5 pages go deeper, about 21 minutes in all. Read them in order, or open the one you need.
- Liquidation preferenceHow does a liquidation preference work — non-participating vs participating?
- Anti-dilution: weighted average and full ratchetWhat is anti-dilution protection — broad-based weighted average vs full ratchet?
- Pro rata rightsWhat are pro rata rights for investors?
- Board seatsHow do board seats work after a priced round?
- Protective provisionsWhat are protective provisions in a term sheet?
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- NVCA Model Legal Documents (opens in a new tab)The model certificate of incorporation, stock purchase, investors' rights, voting and ROFR/co-sale agreementsFree to read
- NVCA Model Certificate of Incorporation (Oct. 2025), §2.1 (opens in a new tab)The liquidation preference: the greater of the preference or the as-converted amountFree to read
- NVCA Model Investors' Rights Agreement (Oct. 2025), §4.1 (Right of First Offer) (opens in a new tab)Pro rata rights: a Major Investor's right to buy into the next roundFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Term sheetThe short summary of a priced round's economics and control terms — price, pre-money, pool, liquidation preference, anti-dilution, board, protective provisions, pro rata — that the definitive documents then implement
- Liquidation preferenceA preferred stockholder's right to be paid a stated amount — usually 1× the original issue price plus declared but unpaid dividends — before common stockholders in a sale or liquidation. Non-participating preferred takes the greater of that or its as-converted share; participating preferred takes both
- Anti-dilution protectionA charter provision that lowers preferred stock's conversion price when the company later sells stock below it. Broad-based weighted average moves it part way, by CP2 = CP1 × (A + B) ÷ (A + C); full ratchet moves it all the way down to the new price
- Pro rata rightAn investor's right to buy its proportionate share of a later round, so it can keep its percentage. In the NVCA model it belongs to Major Investors; on a post-money SAFE it lives in an optional side letter
- Protective provisionsActions the company may not take without the consent of a set majority of the preferred — selling the company, changing the charter against the preferred, creating a senior class, changing authorized shares, paying dividends, changing the board's size
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.