Reading a term sheet

A term sheet sets out the main terms of a priced investment before the full legal documents are drafted. Most of it is not legally binding, but it sets expectations that are hard to change later. Knowing which terms matter, and what is typical, helps you negotiate the ones that count.

What the market looks like

Cooley's Q1 2026 Venture Financing Report, covering 165 financings totaling $39.9 billion, gives a view of current terms:¹

• 98.2% of deals had a 1x liquidation preference.
• 96.4% used non-participating preferred stock.
• 86% were up rounds; down rounds were 11.4%.
• Pay-to-play provisions appeared in 7.3% of deals and redemption rights in 6.1%.

Economic terms

• Valuation. Pre-money valuation plus the new investment equals post-money. Check what is included in the fully diluted share count, especially any option pool increase.
• Liquidation preference. On a sale, investors get their money back (1x) before common stockholders. Anything above 1x, or a participating preference, shifts more of the proceeds to investors.
• Participation. Non-participating preferred chooses between its preference or converting to common. Participating preferred gets both.
• Anti-dilution. Adjusts the investor's conversion price if a later round is priced lower. Broad-based weighted average is the common, more founder-friendly form; full ratchet is rare and harsh.
• Dividends. Usually non-cumulative and only if declared. Accruing dividends add to what investors receive.

Control terms

• Board composition. Who appoints each seat after the round.
• Protective provisions. Actions that need investor approval, such as selling the company or issuing senior stock.
• Pro rata rights. The right to invest in future rounds to maintain ownership.
• Drag-along. Requires stockholders to support a sale approved by a set majority.
• Pay-to-play. Penalizes investors who do not participate in future rounds, usually by converting their preferred stock to common.

What diligence will check

Once a term sheet is signed, confirmatory diligence begins. Expect requests for your cap table, material contracts, IP assignments, corporate records and financials. Having them in order shortens the time from term sheet to close. Our data room guide covers what to prepare.