A term sheet is mostly non-binding, which makes people casual about it. That is a mistake: the terms agreed here are the ones your counsel will spend billable hours failing to renegotiate later. Read it yourself first, in this order.
Economics
- Pre-money versus post-money valuation, and whether the option pool is carved out of the pre-money. A pool carved pre-money is a discount to your price, quietly taken.
- Liquidation preference. One times, non-participating is the market norm. Participating preferred or a multiple means the investor is paid twice in a modest exit.
- Anti-dilution. Broad-based weighted average is standard. Full ratchet transfers the entire cost of a down round to the founders.
Control
- Board composition, and specifically who appoints the independent seat.
- Protective provisions: the list of decisions the investor can veto. Read every line and ask whether an ordinary operating decision has quietly become a negotiation.
- Drag-along thresholds, which determine whether you can be compelled into a sale you do not want.
There is a prior question for Indigenous-owned businesses. Equity dilution can affect ownership percentages that qualify you for procurement set-asides, certification, and Indigenous-specific capital programs. A round that takes majority ownership below the relevant threshold may be more expensive than its cap-table cost suggests. Model that before you sign, and know what the non-dilutive alternatives would have covered.
The best term sheet review often ends with a smaller round, a larger grant stack, and a debt facility.