Term Sheet Triage

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:

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:

5) Extract economics that matter

For priced rounds:

For SAFEs/notes:

6) Extract control terms

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)

8) Side letter analysis (often where sharp edges hide)

Common side letter provisions to review:

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:

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.