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1. What exactly are the economics of the round?
Start with a fully diluted capitalization model, not the headline valuation. Ask the investor and your counsel to show how the proposed investment changes ownership immediately after closing and under plausible future outcomes.
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How much money is being raised, and at what price?
- What is the total round size, and is the investor’s commitment firm or subject to a syndicate, diligence, or later approval?
- Is the valuation quoted pre-money or post-money? Which shares, options, warrants, and promised grants are included in the calculation?
- What price per share is being paid, and which securities are issued?
- How much of the company will the new investor own at closing on a fully diluted basis?
- Are there existing convertible notes, SAFEs, warrants, or other instruments that convert in this round?
Have counsel reconcile the term sheet, capitalization table, conversion calculations, and stock-purchase documents. A percentage that looks attractive on a pre-money slide can produce a different result once all outstanding rights and the option pool are counted.
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Who bears the option-pool dilution?
Ask whether the employee option pool is created or increased before the financing (usually reducing the pre-money ownership of existing holders) or after it (spreading that dilution among all shareholders). Confirm the target pool size, whether ungranted promises are included, and whether the investor can require a further increase before closing. Request an ownership table showing founders, employees, existing investors, and the new investor both before and after the pool adjustment.
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What happens in a sale or conversion?
Preferred stock can have rights that ordinary common shares do not. Ask your lawyer to explain the exact liquidation preference, whether it is participating or non-participating, whether any return is cumulative, and how dividends, seniority, and multiple preferred series interact. Ask when the preferred shares may convert to common, who can elect conversion, and whether a conversion is automatic in specified transactions. Do not assume a particular preference or anti-dilution formula is universal; the drafted charter and agreements control.
Have you modeled downside as well as the target exit?
Use the documents to build at least three scenarios: an exit above expectations, a modest sale, and a down-round or shutdown. Show proceeds by security class, the effect of additional financing, and the ownership impact of exercising options and converting outstanding instruments. A counsel-reviewed waterfall is more informative than a single valuation number.
2. Who controls decisions after closing?
Board and consent provisions can alter how the company is run even when founders retain most of the shares. UK government guidance describes board composition as the allocation of control and oversight and lists investor consents among the key term-sheet subjects. That guidance is UK-focused, not a statement of US law or a universal market rule. Read the governance documents for your jurisdiction.
How will the board be composed?
- How many seats exist immediately after closing?
- Who appoints each seat: founders or common holders, the preferred holders, independent directors, or another class?
- Who selects any independent director, and what happens if the parties cannot agree?
- Is there a board observer, and what information or meeting access does that person receive?
- What quorum and voting thresholds apply, and can an investor-appointed director block action by withholding attendance?
Ask for an organization chart showing the board before and after the financing, including vacancies, observer rights, and any changes triggered by future rounds.
Which actions require investor consent?
Identify every protective provision in the charter, voting agreement, investor-rights agreement, and related documents. Typical subjects may include issuing senior or equal securities, changing the charter, taking on significant debt, selling the company, paying dividends, changing the business, approving a budget, or entering related-party transactions. The important question is scope: do approvals cover only major structural actions, or can they reach ordinary operating decisions such as hiring, pricing, spending, or contracts?
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Ask who holds the veto: a named investor, a majority of the preferred series, a class vote, or a board representative. Confirm thresholds, sunset dates, and whether rights expand in a down-round or after the investor’s ownership falls.
3. What happens to founder equity if a founder leaves?
Founder shares are often subject to vesting, repurchase, or forfeiture terms that continue after the financing. Get the consequences in writing for every realistic departure scenario.
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- What is the vesting start date and schedule?
- Is there a cliff, and does prior service receive credit?
- What acceleration applies on a sale, termination without cause, or a material change in role?
- Do replacement grants or refresh grants create a new vesting schedule?
Check whether the documents treat founder stock differently from employee options. Confirm who owns the repurchase right, the exercise period, and the price for any repurchased shares.
What is the leaver treatment?
Ask counsel to map the result for resignation, termination for cause, termination without cause, death, disability, incapacity, and a sale of the company. Determine which vested shares can be retained, which unvested shares are cancelled or repurchased, the price applied, and who decides whether a departure qualifies for a favorable or unfavorable category. Do not assume that “good leaver” and “bad leaver” labels have the same meaning in every deal or country.
Also ask whether a founder’s employment agreement, intellectual-property assignment, confidentiality obligations, or non-compete and non-solicit provisions affect the equity outcome. Local enforceability varies, so obtain jurisdiction-specific advice.
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4. What continuing rights do investors receive?
The term sheet is a summary; operative rights may appear in several definitive agreements. In the US venture-document set maintained by the National Venture Capital Association (NVCA), the model suite includes an Investors’ Rights Agreement, Voting Agreement, Right of First Refusal and Co-Sale Agreement, Certificate of Incorporation, and Stock Purchase Agreement. The current model-documents page notes revisions reflecting legal changes and evolving norms, including updates listed for October 2025 and June 2026: NVCA model legal documents.
Information and inspection rights
Ask what financial statements, budgets, operating metrics, cap-table updates, and other reports must be delivered; how often; in what format; and subject to what confidentiality restrictions. Clarify whether access is limited after the investor’s ownership falls below a threshold and whether an observer or affiliate may receive the information.
Participation and future-round rights
Determine whether the investor has a right to participate pro rata in later financings, whether that right is transferable to affiliates, and what happens if it is not exercised on time. Ask about rights of first offer or refusal, major-investor thresholds, and any obligation to include the investor in a minimum allocation.
Registration, transfer, and co-sale rights
Ask when registration rights can be used, who pays the expenses, and whether demand, piggyback, or other procedures apply. Review transfer restrictions, rights of first refusal, co-sale provisions, and permitted transfers to affiliates or funds. These details can affect a future sale of founder shares as well as an eventual public offering.
Read the complete agreements rather than relying on a summary. The negotiated language, definitions, schedules, and conflict rules determine what the investor can actually do.
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5. When is the money actually available?
A signed term sheet does not necessarily mean the company can spend the full amount. Ask for a closing timetable and a complete list of conditions.
What must happen before the first closing?
- Which legal, financial, technical, tax, compliance, and intellectual-property diligence items remain open?
- Are there required consents from existing investors, lenders, shareholders, regulators, or a board?
- Which representations, warranties, disclosure schedules, and indemnities must the company provide?
- Can the investor walk away if diligence findings, market conditions, or internal approvals change?
- Are fees, expenses, exclusivity, or a no-shop period payable before the investment closes?
Have counsel distinguish conditions that are objective and documentable from conditions controlled by the investor’s discretion. Ask what happens if a condition is disputed and whether the company can terminate exclusivity without a penalty.
Are there tranches?
Some financings release capital in time-based or milestone-based tranches. NVCA says its revised models include mechanics for tranche financings. Ask:
- How much is funded at each closing and on what date?
- What precisely constitutes achievement of each milestone?
- Who determines whether it has been met, using which evidence and deadline?
- Can the investor delay, reduce, or cancel a later tranche?
- What operating plan, hiring, runway, and spending assumptions apply if a tranche is late?
- What dispute process and cure period exist if the company believes the milestone was achieved?
Model cash runway under on-time, delayed, and cancelled-tranche cases. A slightly lower valuation with dependable funding can be more useful than a higher headline number that leaves the company exposed to a timing gap.
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Use the same assumptions for every proposal. Put the terms in one comparison sheet and ask counsel to verify that equivalent concepts are being compared.
| Comparison area | Questions to put side by side |
|---|---|
| Valuation and dilution | What are the pre-money and post-money figures, fully diluted ownership, conversion effects, and option-pool treatment? |
| Downside economics | How do preference, participation, dividends, conversion, seniority, and anti-dilution provisions affect a modest exit, down-round, or shutdown? |
| Governance | Who appoints directors, who has an observer seat, and what quorum and voting rules apply? |
| Investor consents | Which actions need preferred-holder, class, board, or named-investor approval, and when do those rights end? |
| Founder equity | What vesting, repurchase, acceleration, and leaver provisions apply to each founder? |
| Continuing rights | What information, participation, registration, transfer, and co-sale rights survive after closing? |
| Closing certainty | Which diligence items, approvals, representations, fees, exclusivity terms, and tranche conditions remain? |
| Funding timing | When does each dollar reach the company, and what is the remedy for a delay or disputed milestone? |
| Investor fit | Can this investor provide the sector expertise, recruiting help, customer access, follow-on capacity, and working relationship the company actually needs? |
Investor fit is not a substitute for fair documents, but it is part of the practical value of the financing. Speak with references supplied by the investor and ask how the investor behaves during missed targets, difficult follow-on rounds, and board disagreements.
7. What professional review is needed?
Use independent counsel experienced in venture financings, representing the company and founders rather than the investor. The lawyer should review the term sheet, charter or articles, stock-purchase agreement, investors’ rights agreement, voting agreement, right-of-first-refusal and co-sale agreement, side letters, employment and equity documents, and every disclosure schedule.
NVCA describes its forms as industry-embraced models, but it expressly cautions: “Each document is intended to serve as a starting point only and should be tailored to meet your specific requirements.” That statement is guidance about using model forms, not evidence that every company uses identical terms. Read the current materials at nvca.org/model-legal-documents and ask counsel how the negotiated drafts differ.
If the company is organized or operating outside the United States, obtain advice in the governing jurisdiction. GOV.UK’s Track 2: Term Sheet Key Points and Guardrails, published 2 December 2025, covers board composition, leaver and vesting provisions, investor consents, valuation, structure, option pools, and fees, and recommends experienced professional and legal advice: GOV.UK term-sheet guidance. It is UK guidance and should not be presented as US law or as a universal market standard.
8. A practical acceptance checklist
- Ask for the complete term sheet and every referenced agreement, schedule, and side letter.
- Build a pre- and post-closing capitalization table that includes options, warrants, notes, SAFEs, and the proposed option pool.
- Request a proceeds waterfall for strong, moderate, and distressed outcomes.
- Draw the post-closing board, observer seats, quorum rules, and appointment rights.
- Mark every investor-consent provision and classify it as strategic, financial, operational, or administrative.
- Write a founder-by-founder equity schedule covering vesting, acceleration, repurchase, and each departure scenario.
- List information, participation, registration, transfer, and co-sale rights with their thresholds and expiry conditions.
- Turn closing conditions and tranche milestones into an owner, evidence, deadline, and dispute table.
- Compare competing offers using identical assumptions for dilution, downside proceeds, governance, timing, and investor fit.
- Have independent counsel explain unresolved provisions in plain language, revise the documents, and confirm that the final capitalization and governance results match what the founders agreed.
9. Questions to ask in the final meeting
- Which term in your proposal most affects founder ownership in a future financing?
- Which decisions would require your consent even if the founders control the common shares?
- Under what circumstances could you replace or block a director?
- What happens to each founder’s vested and unvested shares after resignation, termination, disability, or a sale?
- What information do you expect, how quickly, and who else may receive it?
- What must be true before each dollar is funded, and who decides whether that condition is satisfied?
- If the company misses a milestone, what cure period, renegotiation, or termination right applies?
- Which provisions are fixed for your fund and which are open to negotiation?
- What would make you support a bridge, down-round, or strategic sale if the original plan changes?
Record the answers and give them to counsel. If an answer is not reflected in the definitive documents, treat it as an expectation rather than a contractual protection.
10. The decision standard
Accept venture capital when the complete package gives the company enough dependable runway and strategic value while leaving founders able to govern, operate, and share fairly in outcomes under realistic scenarios. Decline or renegotiate when the offer’s downside economics, broad operating vetoes, uncertain funding, or founder-departure rules are unacceptable, even if the valuation is exciting. The right answer depends on the company’s jurisdiction, stage, alternatives, and risk tolerance; there is no single term that is correct for every financing.
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