VC Term Sheets

I spent three years working inside startups before moving into the MNC world, and if there’s one thing that stuck with me from that time, it’s this: the people signing the most consequential documents of their careers — founders signing their first VC term sheet — are very often signing something they only half understand. Not because they’re careless. Because term sheets are written in a dialect that sounds like English but works like law, by people (VCs and their lawyers) who have signed hundreds of these, against founders who are usually signing their first one.

This post is my attempt to translate that dialect into plain language — both sides of the table. First, the seven clauses hiding in most term sheets that quietly decide who actually controls the company later. Second, a scoring framework for founders to evaluate a VC before pitching them, so the relationship isn’t as one-sided as it usually is.

None of this is legal advice — it’s the plain-English version of what a founder should already understand before a lawyer starts using the technical version.

Part 1: The 7 Term Sheet Clauses That Decide Who Actually Owns Your Company

A VC term sheet isn’t a handshake. It’s a legal document written by people who’ve signed hundreds of them. Here are the seven terms that matter most, explained the way I wish someone had explained them to me.

Term 1: Dilution

In plain English: Every time you raise a new round of funding, your ownership percentage of the company shrinks — not because anyone stole anything from you, but because the total pie got bigger and new investors got a slice of it.

The numbers: Say you own 60% of your company today. You raise a new round, and investors get 20% of the company as part of that deal. You don’t stay at 60% — you now own 48%, while the investors hold 20% and everyone else (earlier investors, employees) holds the remaining 32%.

Why it happens: It’s simple math — 100% of a company split among more people means everyone’s individual slice gets smaller, even though the company itself (hopefully) got more valuable in the process.

The takeaway: Dilution is a normal, expected part of raising money — it’s not a red flag by itself. What’s dangerous is unexpected dilution, where you didn’t model it out ahead of time and get surprised by how small your final slice actually is.

Founder tip: Before you raise any round, actually model out two or three future rounds and see what your ownership looks like after each one. Surprises here are expensive, and they’re avoidable with ten minutes of spreadsheet math.

Term 2: Pro-Rata Rights

In plain English: This gives your existing investors the right (not the obligation) to invest again in your future funding rounds, specifically so their own ownership percentage doesn’t shrink when you raise more money.

Sounds fair, right? It is, on the surface — an investor who backed you early gets the option to keep their stake proportional as the company grows.

The catch: If all of your early investors exercise this right at once, there’s less room left in the round for new investors — which can make it genuinely harder to close future rounds, or force you to accept a less favorable valuation just to make the math work.

How it actually plays out, step by step:

An investor invests in your company at an early stage.
You announce a new funding round later.
That early investor now has the option to invest their pro-rata share in the new round.
If they take it, they maintain their original ownership percentage instead of getting diluted like everyone else.

The takeaway: Pro-rata rights protect your early investors’ ownership, but they can genuinely complicate your ability to bring in new investors down the line. Understand the dynamics before you sign, not after you’re trying to close a Series B and running out of room in the cap table.

Term 3: Liquidation Preference

In plain English: If the company gets sold or shuts down, investors get paid back before founders see a single dollar — regardless of how much of the company you personally own.

1x vs. 2x — the difference matters enormously:

A 1x liquidation preference means investors get their original investment back first, before anyone else gets paid.
A 2x liquidation preference means investors get double their original investment back first — a much more aggressive term.

A real example that shows why this matters:

If an investor put in $1,000,000 with a 1x preference, and the company later sells for $1.5M: the investor gets their $1,000,000 back first, and the founder gets whatever’s left — $500,000.
If that same $1,000,000 investment had a 2x preference instead, and the company sells for $2.5M: the investor gets $2,000,000 back first, and the founder still only gets $500,000 — even though the company sold for a million dollars more.

The takeaway: Liquidation preference exists to protect investors’ downside. But a higher multiplier can leave founders with little or nothing in an exit that, on paper, looked like a win. Always know the multiplier before you sign — it’s arguably the single most financially consequential number in the entire term sheet.

Term 4: Anti-Dilution Protection

In plain English: If you raise a future round at a lower valuation than your current one — called a “down round” — anti-dilution clauses kick in to protect your investors by automatically adjusting their ownership percentage upward. Which means yours goes down even further than a normal dilution would.

A real example:

Before a down round: you own 60%, investors own 40%, and the company is valued at $10M.
The company then raises a new round at a lower $6M valuation.
After the down round, with anti-dilution protection kicking in: you now own 45%, and investors own 55% — a much bigger hit to your ownership than the round size alone would suggest.

Two main types, and they are not remotely equal:

Broad-based weighted average (founder-friendly): Adjusts based on both the new round’s price and how many new shares were issued to new investors. This results in less dilution to you and a more balanced outcome.
Full ratchet (not founder-friendly): Adjusts based only on the new, lower share price, completely ignoring how many new shares were actually issued. This gives investors maximum protection — and means maximum dilution for you.

The takeaway: Anti-dilution protection can genuinely save your investors in a down round, but it can hurt founders even more than the down round itself. Know which type is in your term sheet, know its real impact on your numbers, and negotiate for broad-based weighted average whenever you have the leverage to ask.

Term 5: Board Composition

In plain English: Whoever controls the board controls the company — full stop, regardless of how much equity you personally hold. Some term sheets give investors one or more board seats, and in a deadlock, that seat is everything.

Three common setups, in order of founder risk:

Founder Majority (Ideal): e.g., 3 founders, 2 investors on the board. Founders maintain control, decisions are easier to make, and investors still have a voice — just not full control.
Balanced Board (Risky): e.g., 2 founders, 3 investors. Deadlocks become more likely, investors can outvote founders, and major decisions may now require investor approval that wasn’t previously needed.
Investor Majority (Dangerous): e.g., 1 founder, 4 investors. Investors control the company outright, founders can be overruled on anything, and there’s a genuinely high risk of losing direction and control of the business you started.

What board approval typically controls: raising capital, hiring/firing executives, budget and compensation decisions, mergers and acquisitions, and the sale of the company itself — in other words, essentially every decision that actually matters at a strategic level.

The takeaway: Your board seat is your voice in the company. Never give up board majority without understanding exactly what decisions require board approval — because losing that majority can mean losing control of a company you still technically own most of.

Term 6: Drag-Along Rights

In plain English: If a majority of investors decide they want to sell the company, drag-along rights force minority shareholders — including you, the founder — to agree to that sale too. Even if you personally don’t want to sell. Even if you think the price is lower than the company is actually worth.

How it works, step by step:

Investors holding more than the required threshold agree to sell the company.
The drag-along clause in the term sheet activates, and it legally forces all shareholders to join the sale on the same terms.
As a minority shareholder at that point, you can’t opt out — you’re legally bound to sell your shares alongside everyone else.
The sale proceeds, and you receive your portion of the proceeds — whether or not the price matched what you believed the company was worth.

The takeaway: Drag-along rights exist to protect investors’ ability to actually exit their investment — without them, a single stubborn minority shareholder could block a sale that everyone else wants. But that same protection can override your own judgment and force you out of a company you built, on someone else’s timeline and someone else’s price.

Term 7: Information Rights

In plain English: Investors with information rights are entitled to regular financial updates from you — monthly, quarterly, or annually, depending on what’s negotiated. This sounds completely harmless, and mostly it is — until you’re in a rough patch, and every single update you send goes straight to a room full of people who now have opinions about your decisions.

What investors can typically request:

Frequency: monthly, quarterly, or annual reporting cadence.
Financials: P&L statements, balance sheet, cash flow, burn rate.
Metrics: KPIs, growth rate, churn, customer acquisition cost (CAC), runway.
Business updates: hiring plans, product roadmap, key milestones.
Other info: essentially any material information about the business.

The takeaway: Information rights keep your investors informed, which is genuinely valuable when things are going well. But too much reporting overhead, especially during a hard period, can cost you focus, confidence, and control of your own narrative — you end up managing investor anxiety instead of managing the business. Share smart. Protect your runway and your peace, not just your cap table.

Part 2: Before You Pitch a VC, Score Them Out of 100

Here’s the part of the VC relationship most founders never think to flip around: you’re not just being evaluated by the VC. You should be evaluating them too — and doing it before you send your deck, not after you’re already three meetings deep and emotionally invested in getting a yes.

The framework below scores a potential VC across seven tests, each worth up to 20 points (for a maximum of a bit over 100 depending on rounding), based purely on publicly knowable information about the fund — no insider access required.

Test 1: Stage Fit Score

The question: Has this VC ever actually written a check at your company’s current stage?

Scoring: Yes = 20 points. No = 0 points.

Why it matters: A growth-stage VC reading a pre-seed deck isn’t going to invest — they’re being polite by taking the meeting at all. Pitching outside a fund’s actual stage focus is one of the most common, avoidable ways founders waste their own time.

Test 2: Sector Conviction Score

The question: Do they have two or more portfolio companies in your specific sector?

Scoring: No portfolio companies in your sector = 0 points. One company = 10 points. Two or more = 20 points.

Why it matters: Conviction follows pattern. A fund that’s never invested in your space, or has only dabbled once, doesn’t have a demonstrated pattern of understanding it — and no pattern usually means no check, no matter how good your pitch is.

Test 3: India Market Score

The question: Do they actually understand India-specific market dynamics? (Swap this for whatever your home market is if you’re building outside India — the underlying question is identical.)

Scoring: An international VC with no India portfolio = 0 points. An India-focused fund = 10 points. A fund that has actually led an India round before = 20 points.

Why it matters: A VC who doesn’t understand the specific dynamics of Tier 2 India (or your local market’s equivalent nuance) can’t add value beyond just the check itself — and “just the check” is often not enough, especially at an early stage where guidance matters as much as capital.

Test 4: Founder Reference Score

The question: Can you get a warm introduction from one of their existing portfolio founders?

Scoring: Cold outreach = 0 points. A mutual connection = 10 points. A direct portfolio founder introduction = 20 points.

Why it matters: The intro itself is the signal. If a VC has funded founders for years and not a single one of them is willing to open a door for you, that’s genuinely worth asking yourself why — it often tells you more about how that VC treats its founders than any pitch meeting will.

Test 5: Value Add Score

The question: Will this VC actually open doors beyond just writing the check?

Scoring: Check only, no further involvement = 0 points. Occasional introductions = 10 points. An active network, hands-on hiring help, and genuine support raising your next round = 20 points.

Why it matters: This is the classic distinction between “smart money” and “just money.” Both are valid depending on what stage and what you need — but you should know which one you’re actually getting before you sign, not discover it six months later when you need help and don’t get it.

Test 6: Portfolio Conflict Score

The question: Do they already fund your direct competitor?

Scoring: A direct competitor already in their portfolio = 0 points. An adjacent-but-not-competing space = 10 points. A completely clean, no-overlap portfolio = 20 points.

Why it matters: A VC with your direct competitor in their portfolio is never going to be fully on your side, structurally, no matter how much they personally like you — and boardroom loyalty, when push comes to shove, tends to follow whichever company has the larger check invested.

Test 7: The Gut Test

The question: After a single meeting, do you actually want this person in every board meeting for the next seven years?

Scoring: This one isn’t point-based — it’s a gut check. If the honest answer takes you more than three seconds to arrive at, treat that hesitation as a “no.”

Why it matters: You will be in a room with this person, or answering their emails, for years — often through the hardest stretches of the company’s life. Trust your gut here. It genuinely has more real data in it, accumulated from the actual meeting, than your pitch deck ever will.

The Investor Fit Matrix: What to Actually Do With Your Score

Once you’ve scored a potential investor across these seven tests, here’s how to act on the total:

80–100 → Priority pitch. Move fast. This is about as strong an alignment as you’ll find — stage fit, sector conviction, clean references, and real value-add all pointing the same direction.
60–79 → Pitch, but negotiate hard on terms. Good enough alignment to be worth your time, but not so strong that you should accept the first term sheet they hand you without pushing back.
40–59 → Only if you have no better option. Proceed with caution. This is the zone where founders talk themselves into a “maybe good enough” investor purely out of fundraising anxiety — worth pausing on before committing.
Below 40 → Don’t pitch. Your time is worth more than their maybe. This is the single hardest piece of advice in this whole framework to actually follow, and also the one that saves founders the most wasted months.

Why I Wanted to Write This Down

Coming from three years inside startups before moving into the MNC world, the thing that struck me most about this whole process is how asymmetric it is by default. VCs do this dozens of times a year, with lawyers, precedent, and pattern recognition built over years. A founder is often doing this once, under time pressure, genuinely excited that someone wants to give them money — which is exactly the emotional state in which it’s easiest to skip the fine print.

None of the seven terms above are inherently evil, and none of the seven investor tests are about being adversarial toward VCs — plenty of great, founder-friendly investors exist, and plenty of these terms are completely standard and reasonable in the right proportions. The point isn’t to walk into a negotiation paranoid. It’s to walk in informed, so that when you do sign — and most founders who raise money eventually do — you know exactly what you signed, and why, instead of finding out what it actually meant three years later when it’s far too late to renegotiate.

Cheers,

Sim