What does a good term sheet look like — and what should I actually negotiate?

You are holding a document that decides the next several years, and most of it does not matter very much. A good term sheet is priced against comparable deals and carries terms a reasonable investor would offer any company at your stage. The work is knowing which lines are the deal and which are documentation, because founders routinely spend their attention and their leverage on the second group.

Five terms are the deal.

You negotiate five things: the price, how much money is going in, the liquidation preference, the option pool, and the board. Those five decide what you own, what you control, and who gets paid in what order. Everything else in the document describes how those five are administered.

Read them together rather than one at a time, because they trade against each other and an investor moving one will often take it back through another. A better price with a larger pool is not a better price. A larger round at the same price is more dilution. A clean preference at a slightly lower valuation is usually a better deal than the reverse, and founders reliably choose the reverse because the valuation is the number they will repeat to other people.

The option pool is a price term.

You will treat the option pool as housekeeping, and it is arithmetic that changes what you paid. A pool created before the money goes in comes out of the existing shareholders, which means it comes out of you, not out of the investor buying in at that price.

So a term sheet that asks for a larger pool has quietly lowered your price without changing the headline number. Ask what the pool is for, and ask for the hiring plan it is sized against — a pool should be built from the roles you actually intend to fill before the next round, not from a percentage someone is used to seeing. If the plan does not need it, the pool is a discount you are handing over.

Know what the document binds.

The deal terms in a term sheet are generally not binding, and that is not the same as free. Two things in it usually do bind: an exclusivity period during which you may not talk to other investors, and confidentiality. The first one matters most, because signing hands over the leverage a second term sheet gives you and starts a clock on a deal you have not closed.

Beyond the paper there is a cost that has nothing to do with enforceability. This is a small market with a long memory, and a founder who signs and then walks without a real reason has spent something they cannot get back. Treat signature as the decision, not as the start of the decision.

Negotiate the five with the partner, not through counsel.

You have these five conversations directly with the person who will sit on your board. Counsel is essential and counsel will negotiate the rest of the document at length, and that work will happen and be billed regardless of what you do. What counsel cannot do is have the conversation about price and control with someone you are about to work with for years.

The conversation is also the point. This is the first time you and this partner are on opposite sides of something real, and how they behave is the best information you will get about them: whether they explain their reasoning, whether "standard" is an argument or a description, whether they move when you make a good case, whether the person in the room can decide. You are diligencing them while they diligence you, and this is the one moment when both of you have something at stake.

Complexity is usually a price change in disguise.

You will be shown a term that is unusual and told it is standard. Slow down there. Structure that is hard to explain is nearly always changing the economics of the deal without changing the number everyone will repeat: a preference greater than the money invested, preferred that both takes its money back and shares in the rest, anti-dilution that is harsher than the ordinary form, a dividend that accrues, warrants attached to the round.

Each of those is a legitimate instrument that exists for a reason, and each of them makes the deal worth less than the headline says. Ask one question of any term you do not recognise: what does this change about who gets what, and at which exit prices? If the answer takes a while, that is the answer. A higher price with structure attached is usually worse than a lower price without it, and the lower clean price is also the one your next investor can price against.

Fair means comparable, not maximal.

A good term sheet is one a reasonable investor would offer a company like yours right now. That is the standard, and it is a lower bar than the best deal anyone has ever heard of and a higher bar than whatever you have been handed.

The way to know is competition rather than research. A second term sheet tells you more about whether the first is fair than any amount of asking around, and it is the only thing that reliably moves a price. Where you cannot get one, ask the partner to walk you through how they arrived at the number. An investor who cannot explain their own price is telling you something.