Lecture 5 - Foundations of Venture Capital:
Term Sheets
Overview
Lecture 5 reads a term sheet the way an investor does. The framing idea is that valuation is the headline, but the terms are the fine print that actually decides where the money goes. Every term sheet is doing two things at once: setting the economics — who gets paid, and in what order — and setting control — who decides. Both are levers on the exit distribution built in Lecture 4.
The session first covers the instruments used to fund an early round: a priced round, a convertible note, and a SAFE, organized around one question — price the round now, or defer the price? It then works through a priced round in two passes, economics and then control, and finishes with a live model showing how a single company's exit proceeds are split. The takeaway is judgment: which terms are worth negotiating depends on the deal in front of you.
Learning Objectives
By the end of this session, a participant should be able to:
-
Separate a term sheet into its economics and control components.
-
Compare priced rounds, convertible notes, and SAFEs, and understand caps and discounts.
-
Explain pre-money vs. post-money valuation and the option-pool effect on real ownership.
-
Understand liquidation preference, participation, and anti-dilution provisions.
-
Read a single-company exit waterfall and see how terms change the payout.
Key Concepts Covered
-
Economics vs. control as the two jobs of a term sheet
-
Instruments: priced round, convertible note, SAFE; valuation cap and discount
-
Pre-money vs. post-money and the option-pool shuffle
-
Liquidation preference — multiple and participation
-
Anti-dilution, pay-to-play, and pro-rata rights
-
Board seats, protective provisions, and founder vesting
-
The single-company exit waterfall
Guest Speaker
None
Go Deeper
-
National Venture Capital Association (NVCA) — model legal documents
-
Cooley GO — term sheet resources and document generators
-
Alex Wilmerding, Term Sheets & Valuations (Deal Terms)
-
Kaplan & Strömberg (2003) — Review of Economic Studies
-
Gornall & Strebulaev (2020) — Journal of Financial Economics
Educational content only. Not investment, legal, or tax advice, and not an offer of any security.