Reading Your Term Sheet Like a Banker

The term sheet lands and your eye jumps straight to the valuation. It's the number you'll text your co-founder. It feels like a verdict on everything you've built. And of every line on the page, it's the one that tells you the least about what you actually walk away with.

The investor across the table is buying preferred stock, not the common stock you hold. Preferred comes with a stack of rights and protections sitting on top of the price. Read a term sheet the way a banker does and you ignore the headline for a minute to ask the one thing that decides your outcome. When the company sells, in what order does the cash come out, and how much is left by the time it reaches you?

Reading a Term Sheet: The Valuation Is the Decoy

A higher valuation isn't automatically the better deal. Investors will gladly hand you a bigger number in exchange for better terms, because they know the terms are where the value actually hides. Chase the headline and skip the structure and you've negotiated against yourself without noticing.

All of it lives in one place, the exit waterfall, which is just the order in which money gets paid out when the company sells. Every protective term is really a note about where the investor stands in that line and how much they collect before you see a dollar. Once you can read the waterfall the term sheet stops being intimidating. It's a list of claims on your future money, and most of them sit ahead of yours.