# A standard and clean Series A term sheet

**Author:** Jason Kwon, Aaron Harris
**Type:** Essay
**URL:** https://www.ycombinator.com/library/4P-a-standard-and-clean-series-a-term-sheet


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While working with companies in YC’s Series A program, we’ve noticed a common problem: founders don’t know what “good”
looks like in a term sheet. This makes sense, because it is often, literally, the first time in their careers that
they’ve seen one. This puts founders at a significant disadvantage because VCs see term sheets all the time and know
what to expect. Because we’ve invested in so many founders over the years and have seen hundreds of Series A term
sheets, we know what “good” looks like. We work with our founders to understand where terms diverge from “good”, what
they can do about that divergence, and when and how it makes sense to negotiate.

Below is what a Series A term sheet looks like with standard and clean terms from a good Silicon Valley VC. Bracketed
items (besides the names of the company and lead investor) are always or frequently negotiated. Items not in brackets
are sometimes negotiated, but this has more to do with the idiosyncratic features of the company or the situation, and
generally aren’t terms that parties intend to heavily bargain over during the negotiation.

One of the critical things you’ll notice is that we didn’t put in standard pricing. While the lead in a Series A round
generally wants 20% of the company, pricing can flex up and down depending on the leverage held by each side. We think
price is an important term, but too specific to each raise to try to create a standard. We’re more concerned with terms
around control and structure that are less familiar to founders, and therefore more prone to cause confusion and
trouble.

Note: this term sheet doesn’t belong to any particular VC -- we drafted it -- but it does substantively reflect what we
see most often. Founders with a lot of negotiating leverage can sometimes do better, and the converse is true too.

[You can also download the Word version of the doc from this page.](https://www.ycombinator.com/series_a_term_sheet/)

It may be surprising to see everything covered in a single page.[1](#footnote1) This wasn’t always the case, but became
common over the last decade as some investors decided to make their term sheets more user friendly by shortening the
legalese as if to say, “We aren’t going to get bogged down in the minutiae. We’re going to make this easy, friendly,
standard and fast.”

This leads us to the most important thing to understand about the term sheet: it’s another way in which your Series A
investor might be telling you something. A contract allocates risks between the parties, so the terms the investor
insists on can sometimes say a lot about the investor’s perceived risks. These perceived risks show up in a couple of
ways.

The first way relates to control terms. We don’t mean the set of investor vetoes in the “Voting Rights” section, which
are pretty standard fare,[2](#footnote2) but rather issues of board composition and the investor’s ability to block or
dictate operational decisions made by the board. The board structure in this term sheet is founder-friendly because the
founders retain board control 2-1.[3](#footnote3) The way in which founders most often lose control at the Series A is
with a 2-2-1 board structure, i.e. 2 founders, 2 investors and an independent board member. The loss of board control is
most significant because it means the founders can be fired from their own company.[4](#footnote4) Another way in which
founders lose some control is a term that doesn’t appear in the standard example above, which is a separate provision
that says the investor director’s approval is required for operational decisions like setting the annual budget,
hiring/firing executives, pivoting the business, adding new lines of business, etc. When boards are set up to take power
away from founders, the investor’s outward justification will frequently be reasons of governance or accountability. But
the more power that’s taken away, the more it’s undeniable that the investor is attempting to structure away a perceived
risk. So when an investor says that they’re committed to partnering with you for the long-term - or that they’re betting
everything on you - but then tells you something else with the terms that they insist on, believe the terms.

The other way perceived risks manifest is if a term sheet includes non-standard or “dirty” economic terms. Here, the
term sheet example is instructive not for what it contains but what it *doesn’t*. Examples of such terms would be:

  - Liquidation preference greater than 1x -- the investor gets back more than its invested capital first.
  - Participating preferred -- the investor double-dips by getting its money back plus its pro rata portion of exit
    proceeds, rather than choosing between the two.
  - Cumulative dividends -- the investor compounds its liquidation preference every year by X%, which increases the
    economic hurdle that has to be cleared before founders and employees see any value.
  - Warrant coverage -- the investor gets extra fully diluted ownership without paying for it at the agreed upon
    valuation.

These are all ways of adding structure to reduce typical venture risk, either directly by boosting the investor’s
downside economics, or indirectly by juicing the upside outcomes. The investor is essentially saying, “I’m sort of
afraid of losing my money.” It can also foreshadow how they might behave when things aren’t going well, such as pushing
you to sell when you don’t want to, or dial back risk when it’s important to take it. Good investors would rather
address economic risks by negotiating valuation, and are otherwise happy to give standard terms because they know that
the real money in venture is not made with structure, but by building long-term value, which they are confident in their
ability to help you do.

The last thing to remember is that your Series A documents are a foundation and precedent for the terms of future
rounds. Good foundations make the next term sheet and financing round fast and simple, as future investors just step
into the same straightforward terms. Doing the opposite complicates future fundraises, such as future investors asking
for the same structure-heavy terms, existing investors refusing to drop terms that subsequent investors want removed as
a precondition of investing, etc. Unwinding bad terms is difficult, and oftentimes impossible.

That said, the point is to get a clean deal, not to cycle a lot to get the perfect deal. No one ever built an enduring
company just by winning their Series A negotiation. Also, even if you can’t get everything right or the way you want it,
you always have the power to execute. If you do that, the value you build can outrun suboptimal terms or establish
leverage to renegotiate later. So don’t lose sight of the ultimate goal: closing fast and getting back to work.

**Notes**

**1.** Some great investors still send longer term sheets, but this has more to do with their preference for going a bit
deeper into the details at this stage, rather than deferring this until the definitive documents. The definitive
documents are derived from the term sheet and are the much longer (100+ pages) binding contracts that everyone signs and
closes on. It’s common to negotiate a few additional points at this stage, though deviation from anything explicitly
addressed in the term sheet is definitely re-trading. Also, in a few places, this term sheet refers to certain terms as
being “standard.” That may seem vague and circular, but term sheets frequently do describe certain terms that way. What
that really means is that there’s an accepted practice of what appears in the docs for these terms among the lawyers who
specialize in startups and venture deals, so make sure your lawyer (and the investor’s lawyer) fit that
description.[↩](#footnoteid1)

**2.** The two most impactful investor vetoes in this section are the veto on a financing, which is covered by clauses
(ii) and (iii), and the veto on a sale of the company, which is in clause (vii). We point these out because the concrete
implications of these clauses aren’t facially obvious, and because most term sheets use similar technical jargon for
these vetoes.[↩](#footnoteid2)

**3.** The founders implicitly control those 2 seats because they’re designated by a majority of common, and founders
generally control a majority of common for a long time. In even more founder-friendly term sheets, those 2 seats may be
designated by the founders themselves (as individuals).[↩](#footnoteid3)

**4.** Whether being fired from the company as an employee also triggers the removal of the founder from the board is a
separate question and depends on what was negotiated in the financing documents. Sometimes a founder’s right to vote her
shares to appoint a director will be conditioned on the founder being currently employed by the company. Whenever
conditions are attached to your rights to vote on anything, make sure to ask your lawyer to walk you through the various
scenarios in which those conditions matter and how they can hurt you.[↩](#footnoteid4)

*This is not legal advice.*

*Thanks to Carolynn Levy, Jon Levy, and Nicole Cadman for their comments on this.*

