# Term Sheet Analysis > term-sheet-analysis - Skill: `brainbytes-dev/term-sheet-analysis` (Agent Skill) - Install (CLI): `npx skillmds@latest add brainbytes-dev/term-sheet-analysis` - Raw SKILL.md: https://api.skillmd.com/api/skills/brainbytes-dev/term-sheet-analysis/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: brainbytes-dev (https://skillmd.com/u/brainbytes-dev) - Updated: 2026-09-17 - Page: https://skillmd.com/skills/brainbytes-dev/term-sheet-analysis --- # term-sheet-analysis Term sheet analysis — economic and control terms for VC deals. ## When to Activate - Reviewing a VC term sheet on behalf of founders or investors - Negotiating economic terms (valuation, liquidation preference, anti-dilution) - Evaluating control provisions (board composition, protective provisions, drag-along) - Comparing multiple term sheets from different investors - Advising on founder vesting and key employee equity terms - Assessing the impact of terms on future fundraising flexibility - Preparing for investor negotiations with data on market-standard terms ## Core Concepts ### Valuation Terms The headline valuation determines ownership, but the details matter as much as the number: - **Pre-money valuation**: Agreed value of the company before the investment. Determines existing shareholder dilution - **Post-money valuation**: Pre-money + investment amount. Investor ownership = investment / post-money - **Fully diluted basis**: Valuation per share is calculated on a fully diluted share count — includes all outstanding shares, options, warrants, and convertibles - **Option pool**: Size and whether created pre-money or post-money is critical. A 20% pool on a pre-money basis at $20M pre-money means the operating company is effectively valued at $16M for existing shareholders - **Price per share**: Post-money / fully diluted shares. Determines conversion ratios and sets the bar for future rounds ### Liquidation Preference The most important economic term after valuation. Determines how proceeds are distributed before common shareholders receive anything: - **1x non-participating**: Standard and founder-friendly. Investor gets 1x their investment back OR converts to common — whichever is higher. Aligns interests at higher exit values - **1x participating**: Investor gets 1x back AND shares in remaining proceeds pro rata. Significantly more investor-favorable. Less common in top-tier VC deals - **Participating with cap**: Participating up to a total return cap (e.g., 3x or 5x). Compromise position - **Multiple preferences (2x, 3x)**: Investor gets 2x or 3x their money before common. Used in distressed or bridge rounds. Severely dilutes common shareholder returns at lower exit values - **Stacking**: Later series typically have priority over earlier series (standard seniority) or may be pari passu ### Anti-Dilution Protection Protects investors from future down rounds by adjusting the conversion price: **Broad-Based Weighted Average (BBWA):** ``` New Conversion Price = Old CP * (A + B) / (A + C) A = Shares outstanding pre-round (fully diluted) B = Shares that would have been issued at Old CP for new round proceeds C = Shares actually issued in new round ``` - Standard market term. Adjusts proportionally based on the size and severity of the down round - "Broad-based" means the denominator includes options and convertibles — more founder-friendly than narrow-based **Narrow-Based Weighted Average:** - Same formula but A includes only outstanding preferred shares (or outstanding preferred + common). More investor-favorable because the smaller denominator produces a larger adjustment **Full Ratchet:** - Conversion price drops to the lowest price at which new shares are issued in any subsequent round. No weighting for the number of shares issued - Extremely punitive for founders and early investors. Rare outside distressed situations - Even a small bridge at a lower price converts all protected shares at the new price **Pay-to-play interaction**: Investors who do not participate in the down round may lose their anti-dilution protection ### Board Composition The board of directors controls major corporate decisions. Composition is a critical control term: - **Common structure at Series A**: 2 founders + 1 investor + 0 or 1 independent = 3-4 seats - **Series B and beyond**: Boards grow; investor seats accumulate. Risk: founders lose board control even while holding majority economic ownership - **Independent directors**: Mutually agreed by common and preferred. Serve as tiebreakers and governance anchors - **Board observer rights**: Non-voting seat, typically for smaller investors or co-investors - **Founder control principle**: Many top VCs support founder-controlled boards through Series B. Control flips to investors typically at later stages or upon underperformance ### Protective Provisions Veto rights given to preferred shareholders over specific corporate actions, regardless of board composition: - **Standard protections** (market norm — reasonable): - Amendment of charter/bylaws that adversely affect the preferred class - Issuance of senior or pari passu securities - Sale, merger, or dissolution of the company - Increase or decrease of authorized shares - Declaration of dividends - Incurrence of debt above a threshold - Change in the size of the board - **Aggressive provisions** (less standard — push back): - Approval of annual budget or material deviations - Hiring/firing of CEO or key executives - Entry into new lines of business - Capital expenditure above a low threshold - Any contract above a specified value ### Drag-Along / Tag-Along - **Drag-along**: If a specified majority (typically holders of majority of preferred and common, voting together) approve a sale, all shareholders must sell on the same terms. Prevents minority holdouts from blocking an exit - **Tag-along (co-sale)**: If a founder or major shareholder sells shares, other shareholders have the right to sell a proportional amount on the same terms. Prevents founders from privately liquidating while investors remain locked in - **Carve-outs from drag**: Typically, drag requires a minimum price or return threshold to protect against being dragged into a fire sale ### Redemption Rights Right for preferred shareholders to require the company to repurchase their shares after a specified period (typically 5-7 years): - **Purpose**: Provides a liquidity backstop if the company has not achieved an exit - **Practical impact**: Most startups cannot fund redemption from cash flow. Creates leverage for investors to force a sale or recapitalization - **Market practice**: Less common in early-stage VC. More common in growth equity and late-stage rounds - **Accounting treatment**: Redeemable preferred may be classified as mezzanine equity or debt under GAAP — affects financial statements ### No-Shop / Exclusivity - **No-shop clause**: Company agrees not to solicit or engage with other potential investors for a specified period (typically 30-60 days) after signing the term sheet - **Break-up fee**: Rare in VC but occasionally included — company pays a fee if it accepts a competing offer - **Fiduciary out**: Board retains the fiduciary duty to consider superior offers — no-shop cannot override this, but creates a practical barrier ### Founder Vesting - **Reverse vesting**: Founders' existing shares become subject to vesting. If a founder leaves, unvested shares are repurchased at cost - **Standard schedule**: 4 years with a 1-year cliff. Some deals credit time already served (e.g., 1 year of credit for founders who have been building for 12+ months pre-funding) - **Acceleration**: Single trigger (100% vesting upon change of control) or double trigger (change of control + termination). Double trigger is market standard; single trigger is founder-favorable - **Rationale**: Protects the company and investors if a founder departs early. Without vesting, a departing founder retains their full stake with no ongoing contribution ## Methodology 1. **Term extraction**: Read the term sheet line by line. Extract every economic and control term into a structured summary 2. **Market comparison**: Compare each term to market standards (NVCA model documents, recent benchmark data). Flag terms that are more aggressive or more favorable than standard 3. **Economic modeling**: Build a cap table and waterfall model reflecting the proposed terms. Compute founder and investor ownership, dilution, and proceeds at various exit values 4. **Scenario analysis**: Model downside (down round, fire sale), base case, and upside exits to understand how terms affect each stakeholder 5. **Anti-dilution impact**: Simulate a future down round — quantify the additional dilution to founders under BBWA vs. full ratchet 6. **Control analysis**: Map board composition and protective provisions. Identify which decisions the founders can make unilaterally vs. those requiring investor consent 7. **Negotiation priorities**: Rank terms by economic and strategic impact. Identify the 3-5 terms most worth negotiating and propose specific counter-offers ## Templates ### Term Sheet Comparison Matrix ``` Term | Investor A (Lead) | Investor B | Market Standard ------------------------|----------------------|----------------------|------------------- Pre-money valuation | $30M | $35M | N/A (deal-specific) Investment amount | $8M | $8M | N/A Post-money | $38M | $43M | N/A Option pool (pre-money) | 15% | 20% | 10-15% Liquidation pref | 1x non-participating | 1x participating | 1x non-participating Anti-dilution | BBWA | BBWA | BBWA Board seats | 2 founder, 1 inv, 1 ind | 2 founder, 2 inv | 2F + 1I + 1 ind Protective provisions | Standard NVCA | Standard + budget | Standard NVCA Founder vesting | 4yr, 1yr cliff, 1yr credit | 4yr, 1yr cliff, no credit | 4yr, 1yr cliff Pro rata rights | Major investors | All investors | Major investors No-shop | 45 days | 60 days | 30-45 days Drag-along | Majority preferred + common | Majority preferred | Common + preferred ``` ### Anti-Dilution Simulation ``` Current Round: Series A at $5.00/share, 2M shares Down Round: Series B at $3.00/share, 1.5M shares Broad-Based Weighted Average: Pre-round fully diluted shares: 10,000,000 Shares at old price ($5): 1,500,000 * $3 / $5 = 900,000 Shares actually issued: 1,500,000 New CP = $5.00 * (10M + 900K) / (10M + 1.5M) = $5.00 * 0.948 = $4.74 Additional shares to Series A: (2M * $5 / $4.74) - 2M = 109,705 shares Dilution to common: ~1.0% additional Full Ratchet: New CP = $3.00 (drops to new round price) Additional shares to Series A: (2M * $5 / $3) - 2M = 1,333,333 shares Dilution to common: ~11.5% additional Impact: Full ratchet creates 12x more dilution than BBWA in this scenario. ``` ### Founder Proceeds at Various Exit Values ``` Assumptions: $8M Series A, 1x NP preferred, 21% investor ownership, 2 founders at 30% each Exit ($M) | Series A | Founder 1 | Founder 2 | Others/Pool -----------|-------------|-------------|-------------|------------ $10M | $8.0M (pref)| $0.6M | $0.6M | $0.8M $25M | $5.3M (conv)| $7.5M | $7.5M | $4.8M $50M | $10.5M(conv)| $15.0M | $15.0M | $9.5M $100M | $21.0M(conv)| $30.0M | $30.0M | $19.0M $250M | $52.5M(conv)| $75.0M | $75.0M | $47.5M Conversion threshold: $38.1M ($8M / 21%) Below $38.1M: Series A takes preference, founders get residual Above $38.1M: Series A converts, everyone shares pro rata ``` ## Quality Gate - [ ] Every economic term extracted and compared to market standards - [ ] Pre-money / post-money arithmetic verified, including option pool impact on effective valuation - [ ] Liquidation preference structure modeled in waterfall at 5+ exit values - [ ] Anti-dilution type identified and simulated for a hypothetical down round - [ ] Board composition analyzed — identify at which point founders lose control - [ ] Protective provisions reviewed against NVCA standard; aggressive provisions flagged - [ ] Drag-along and tag-along provisions checked for minimum price thresholds - [ ] Founder vesting terms reviewed: schedule, cliff, credit for past service, acceleration triggers - [ ] Pro rata rights and information rights documented - [ ] No-shop period and exclusivity terms assessed for reasonableness - [ ] Redemption rights (if present) analyzed for financial feasibility and accounting impact - [ ] Negotiation priorities ranked by economic impact with specific counter-proposals drafted