Reading Your Term Sheet Like a Banker

A term sheet arrives and the eye goes straight to one number: the valuation. It is the number you will tell your co-founder, the one that feels like a verdict on everything you have built. It is also, of every term on the page, the one that tells you the least about what you will actually walk away with.

The investor across the table is not buying common stock like yours. They are buying preferred, a security with rights and protections stacked on top of the price. Reading a term sheet like a banker means ignoring the headline for a moment and asking the only question that matters: when this company sells, in what order does the money come out, and what is left by the time it reaches me?

The Valuation Is the Decoy

A higher valuation is not automatically a better deal, and sometimes it is a worse one. Investors will happily trade you a bigger number for better terms, because they know the terms are where the value hides. A founder who optimizes for the headline and ignores the structure has negotiated against himself and does not know it yet.

The place all of this lives is the exit waterfall: the sequence in which proceeds are paid out when the company is sold. Every protective term is really an instruction about where the investor stands in that line, and how much they take before you get anything. Learn to read the waterfall and the term sheet stops being intimidating. It becomes a set of claims on your future money, most of them ahead of yours.