MBA Venture Term Sheet Card Template

Venture Term Sheet Concept Card: [Your company, case or course]

A concept card for reading, modelling and negotiating a venture capital term sheet beyond price: liquidation preference multiples, participation and caps, seniority, cumulative dividends, price-based anti-dilution (full ratchet, broad-based and narrow-based weighted average), pay-to-play, redemption, and the control terms (board composition, protective provisions, drag-along, rights of first refusal and co-sale, pro rata and information rights). It is for MBA students in the venture capital and entrepreneurial finance electives, founders and early employees facing a round, and candidates for venture investing roles. It builds on mba/mba-venture-finance-cap-table-card, which you should read first: that card teaches pre-money and post-money, the option pool shuffle, 1x preferences and the basic exit waterfall, and this card continues its Corvane Robotics cap table into a down round. Source basis: the NVCA model legal documents (nvca.org, checked October 2026) for the structure and common wording of terms, Kaplan and Stromberg (2003) and Hellmann (1998) on venture contracts and control rights, and Gornall and Strebulaev (2020) on how terms change value, all summarised in original words. Replace every [bracketed] value and every row marked Example. This is a learning aid, not legal, tax or investment advice: a term sheet leads to binding legal documents, and the signed text and qualified counsel govern.

Document control

Contents

• When to use it
• The idea in plain language
• The terms one by one
• Formulas and notation
• Assumptions and limits
• How founders, investors and boards use this
• Worked example A (fully solved): Corvane Robotics raises a down round
• Worked example B (half solved): dividends, participation and a ratchet at Start-up Q
• Exercise C (unsolved): pay-to-play at Company R
• Process diagram
• Connections to other cards
• Common mistakes and misconceptions
• Self-test questions
• My notes and next steps
• Sources and further reading
• Answer key
• Revision history

When to use it

The idea in plain language

A term sheet is a short, mostly non-binding summary of the deal that the lawyers then turn into the full financing documents. Price gets the headlines, but a venture investment is a bundle of rights, and the bundle matters as much as the price. Kaplan and Stromberg (2003), studying real venture contracts, showed that investors separate and allocate three kinds of rights: cash flow rights (who receives what in which outcome), control rights (board seats, votes and vetoes) and contingent rights that shift control or cash to the investor when performance is poor. Hellmann (1998) explained why entrepreneurs may rationally give up control rights such as the power to replace the CEO.

Three ideas carry most of the economics.

• Downside protection. The liquidation preference pays investors before common. A multiple above 1x, participation and cumulative dividends make the protection larger. They matter most in modest exits, exactly where founders and employees are most exposed.
• Price protection. Anti-dilution adjusts an earlier investor's conversion price when the company later sells shares more cheaply (a down round). A full ratchet resets the price to the new, lower price; a weighted average adjusts it part of the way, by how much new money came in at the lower price.
• Control. Board seats decide strategy and the CEO; protective provisions give preferred holders a veto over listed actions (new senior securities, a sale, changes to the charter); drag-along lets a majority force a sale.

The trade-off is constant: a founder can often obtain a higher headline price by accepting stronger protection, and the higher price can be worth less. Gornall and Strebulaev (2020) show that because each new round's terms differ, the headline post-money valuation (newest price times all shares) overstates the value of the company, sometimes by a large margin. Read price and terms together.

The terms one by one

The table describes common forms of each term in original words. The NVCA model documents page (nvca.org, checked 2026-10-28) lists the model Certificate of Incorporation, Stock Purchase Agreement and Investors' Rights Agreement as updated October 2025, the Voting Agreement as updated June 2026 and the Right of First Refusal and Co-Sale Agreement as updated April 2026, and describes them as starting points to be tailored. A stand-alone venture financing term sheet was not listed on that page when checked. Check the current revision dates before you rely on them, and remember that practice differs by country and by stage.

Weighted average versus ratchet. The weighted average formula in many charters adjusts the conversion price by the ratio of (shares before plus shares the new money would have bought at the old price) to (shares before plus shares actually issued). "Broad-based" counts all common outstanding plus shares issuable on outstanding options and convertibles in "shares before"; "narrow-based" counts fewer shares, which makes the adjustment larger. The exact definition is in each charter.

Formulas and notation

Conversion. Each preferred share converts into common at the ratio of its original issue price to its current conversion price:

Weighted average anti-dilution:

Full ratchet: $CP_2 = P_{new}$ (the new, lower price).

Cumulative dividend (simple, non-compounding) added to the preference after $t$ years:

Payoffs to one preferred class with preference $L$, as-converted share $\alpha$, exit equity $E$ after senior claims, and cap $M$ times the investment $I$ (as in the core card):

Assumptions and limits

1. Definitions are in the documents. The broad-based "A", the list of exempt issues (option grants, conversions) and the seniority order are defined in each charter. The card uses common conventions.
2. Equilibrium conversion. In the waterfalls each non-participating class (and each capped participating class) converts when converting pays it more, given what the others do. The script searches for that stable choice.
3. Options at exit. As in the core card, granted options are treated as exercised common, strike prices are ignored and the unissued pool is cancelled.
4. No dividends unless stated. Worked example A has no dividends; Worked example B shows their effect.
5. Pari passu among the earlier series. Seed, Series A and Series B rank equally with each other in Worked example A; the Series C ranks senior to all of them.
6. No management carve-out. Companies in a low exit sometimes create a carve-out plan so that management is paid something; that changes the waterfall and is a negotiated, case-specific term.
7. Taxes and law ignored. Tax treatment and the enforceability of terms differ by country. Take qualified legal and tax advice before relying on any term.

How founders, investors and boards use this

Gompers, Gornall, Kaplan and Strebulaev (2020) report from surveys that venture capitalists see the management team as the most important factor in their investment decisions and that they negotiate many contract terms beyond valuation. Bengtsson and Sensoy (2011) report evidence that more experienced investors tend to obtain weaker downside cash flow protection but stronger board representation, consistent with investors substituting monitoring for contractual protection.

Worked example A (fully solved): Corvane Robotics raises a down round

Situation (fictional). After the Series B in mba/mba-venture-finance-cap-table-card (USD 30m at USD 5.0501 per share, USD 150m post-money, 29,702,624 fully diluted shares), Corvane Robotics misses its deployment plan and needs USD 21m. A new lead investor offers USD 3.50 per share. The Series B charter contains broad-based weighted average anti-dilution. The earlier Seed and Series A prices (USD 1.1397 average and USD 2.1560) are below USD 3.50, so only the Series B is adjusted. There is no pool top-up in this round. All numbers are fictional.

Step 1: the round.

Step 2: anti-dilution for the Series B. $CP_1$ = USD 5.0501 (=30000000/5940525). The new money would have bought $B$ = 4,158,367.5 shares at $CP_1$; $C$ = 6,000,000 were issued.

Conversion shares: =ROUND(5940525*(30000000/5940525)/CP2,0), which simplifies to =ROUND(30000000/CP2,0). Use the unrounded $CP_1$ in the sheet.

Step 3: who bears the adjustment. Fully diluted ownership after the Series C:

Options and the unissued pool make up the rest of each column. The extra Series B shares are worth USD 1.24m at the Series C price under the broad-based formula (=354160*3.5) and USD 9.21m under a full ratchet (=2630904*3.5). Every other holder, including the new Series C, bears that transfer pro rata unless the Series C insists on a fixed percentage, in which case it is pushed onto the others. This is why sophisticated new investors price the anti-dilution of earlier series into their offer, and why full ratchets make down rounds harder to close.

Step 4: two Series C term sheets. With the broad-based adjustment applied, the new investor offers two structures at the same USD 3.50 price:

• Term sheet X: 1x non-participating, senior to all earlier series.
• Term sheet Y: 1.5x participating, capped at 3x the investment (USD 63m total), senior to all earlier series.

At exit the unissued pool is cancelled: 33,086,522 shares, of which the Series C holds 18.13%. The founders hold 76.92% of common. Preferences total USD 68.5m under X and USD 79.0m under Y.

Excel at USD 100m, term sheet Y: the Series C takes 31.5 first; the Series B keeps its USD 30m preference and the Series A its USD 12m, the Seed converts; the remaining USD 26.5m is shared by common (10,400,000), Seed (4,825,974) and Series C (6,000,000), so the Series C receives =31.5+26.5*6000000/(10400000+4825974+6000000) = 38.991 and common =26.5*10400000/21225974 = 12.984, of which founders =12.984*8/10.4 = 9.99.

Reading. At a USD 50m exit both term sheets leave the founders with nothing: the preference stack is the whole story. Between about USD 100m and USD 250m, term sheet Y costs the founders USD 5m to USD 9.4m. Above about USD 347m the Series C converts under both (18.13% of the exit exceeds the USD 63m cap) and the terms stop mattering. A founder who believes the realistic range is USD 100m to USD 200m should prefer X; a higher price offered with Y would have to recover USD 7.6m to USD 9.4m of founders' proceeds in that range before Y is better.

Worked example B (half solved): dividends, participation and a ratchet at Start-up Q

Situation (fictional). Start-up Q has 12,000,000 common shares (founders and employees) and one Series A: USD 6m at USD 1.50 per share, with an 8% cumulative, non-compounding dividend and a 1x preference. The class terms are being negotiated: non-participating, or participating capped at 3x.

Part (a): a sale after four years with no further rounds.

Part (b): instead of a sale, a down round. New investors put in USD 3m at USD 1.00 per share. The Series A has broad-based weighted average anti-dilution with $A$ = 16,000,000.

(12) In one sentence each: why does the capped participating class sometimes prefer to convert, and why does the cumulative dividend matter most in a low exit?

Exercise C (unsolved): pay-to-play at Company R

Company R has 10,000,000 common shares and 4,000,000 Series A shares bought at USD 1.60 (USD 6.4m), held by Fund I (2,400,000) and Fund J (1,600,000). The Series A has a 1x non-participating preference and broad-based weighted average anti-dilution. A new lead offers a USD 8m Series B at USD 1.00 per share with a pay-to-play term: Series A holders must buy their pro rata share of half the round (USD 4m in total), or their Series A shares convert to common one for one and lose the preference and the anti-dilution adjustment. Fund I takes up its share; Fund J does not; the new lead buys the rest. Use $A$ = 14,000,000.

1. How much must Fund I and Fund J each invest to keep their rights?
2. Compute the Series A conversion price after the adjustment and Fund I's Series A conversion shares.
3. Compute fully diluted ownership after the round for the founders (common), Fund I (Series A as converted plus its Series B shares) and Fund J.
4. Compute the total preference held by Fund I and by Fund J after the round.
5. Explain why a lead investor asks for pay-to-play in a down round, and one risk it creates for the company.
6. Draft two questions the founders should ask their counsel before accepting the term.

Process diagram

The loop back from the two decisions to the cap table is the point of the diagram: every trade changes the share counts or the waterfall, so the model is rerun after each concession. Worked example A follows the left branch once: it updates the cap table for the down round and the Series B adjustment, runs the waterfall for X and Y, and finds that X protects the founders in the realistic exit range.

Connections to other cards

Common mistakes and misconceptions

1. Comparing headline valuations only. At the same price, a 1.5x participating preference costs the founders USD 5m to USD 9.4m across the USD 75m to USD 250m exits in Worked example A; a somewhat higher price must make up that gap before the participating offer is better.
2. Forgetting earlier series' anti-dilution. A down round triggers adjustments that dilute everyone, including the new investor; model them before agreeing the new price.
3. Assuming broad-based is the same everywhere. The definition of $A$ varies; read it.
4. Ignoring accrued dividends. A cumulative 8% dividend adds 32% of the investment to the preference after four years.
5. Treating "1x" as harmless. Even a clean 1x preference stack leaves common with nothing when the exit is below total invested capital.
6. Overlooking control. Protective provisions and drag-along decide whether a sale or a new round can happen at all; a minority investor with a veto can block a deal the majority wants.
7. Believing the post-money is fair value. Gornall and Strebulaev (2020) show it overstates value when terms differ across series.
8. Signing a no-shop without a plan. Exclusivity weakens the company's alternatives; agree its length and the conditions for ending it.

Self-test questions

1. Name three cash flow terms and three control terms.
2. Explain the difference between participating and non-participating preferred in two sentences.
3. Why does a narrow-based weighted average favour the protected investor more than a broad-based one?
4. A Series A bought at USD 2.00 has broad-based protection with $A$ = 10,000,000. The company raises USD 2m at USD 1.00. Compute the new conversion price and the common shares per Series A share.
5. What does a 6% cumulative dividend add to the preference of a USD 10m investment after five years?
6. Under a full ratchet, a series bought at USD 1.20 is adjusted after a round at USD 0.80. What is the new conversion ratio?
7. In Worked example A, why does term sheet Y cost founders nothing at a USD 400m exit?
8. What is pay-to-play, and whom does it protect?
9. Why might an experienced investor accept weaker downside protection in exchange for a board seat?
10. Name two terms that can make the company hard to finance in the next round.

My notes and next steps

Sources and further reading

• National Venture Capital Association. Model Legal Documents (Certificate of Incorporation, Stock Purchase Agreement, Investors' Rights Agreement updated October 2025; Voting Agreement updated June 2026; Right of First Refusal and Co-Sale Agreement updated April 2026). nvca.org/model-legal-documents, checked 2026-10-28.
• Kaplan, S. N., and Stromberg, P. (2003). Financial contracting theory meets the real world: an empirical analysis of venture capital contracts. The Review of Economic Studies, 70(2), 281-315.
• Hellmann, T. (1998). The allocation of control rights in venture capital contracts. The RAND Journal of Economics, 29(1), 57-76.
• Gornall, W., and Strebulaev, I. A. (2020). Squaring venture capital valuations with reality. Journal of Financial Economics, 135(1), 120-143.
• Gompers, P. A., Gornall, W., Kaplan, S. N., and Strebulaev, I. A. (2020). How do venture capitalists make decisions? Journal of Financial Economics, 135(1), 169-190.
• Bengtsson, O., and Sensoy, B. A. (2011). Investor abilities and financial contracting: evidence from venture capital. Journal of Financial Intermediation, 20(4), 477-502.
• Practitioner books and textbooks (by name only): Feld, B., and Mendelson, J., Venture Deals; Metrick, A., and Yasuda, A., Venture Capital and the Finance of Innovation; Gompers, P., and Lerner, J., The Venture Capital Cycle.
• Open resource: OpenStax, Entrepreneurship (CC BY-NC-SA 4.0), chapters on funding and financing.

Answer key

Worked example B. (2) USD 1.92m (=6000000*8%*4). (5) At USD 60m: USD 15.0m (the class converts, because 25% of USD 60m exceeds USD 7.92m); formula =MAX(MIN(E,7920000),0.25*E). (6) At USD 20m: USD 10.94m (=7920000+0.25*(20000000-7920000)); at USD 120m: USD 30.0m (converts, because 25% of USD 120m exceeds the USD 18m cap). (7) The cap is reached at USD 48.24m (=(18000000-7920000)/0.25+7920000); the class converts above USD 72.0m (=18000000/0.25). (9) USD 1.4211 (=1.5*(16000000+2000000)/(16000000+3000000)). (10) 4,222,222 shares (=ROUND(6000000/1.4211,0) with the unrounded price), 222,222 extra. (12) Above the cap, the as-converted share grows with the exit while the capped payoff does not, so converting pays more; in a low exit the preference, including accrued dividends, is most or all of what the class receives, so each year of accrual moves money from common.

Exercise C. (1) Fund I USD 2.4m, Fund J USD 1.6m (60% and 40% of USD 4m). (2) $CP_2$ = USD 1.3818 (=1.6*(14000000+5000000)/(14000000+8000000)); Fund I converts into 2,778,947 shares (=ROUND(2400000*1.6/1.3818,0) with the unrounded price). (3) Total 22,378,947 shares: founders 44.68%, Fund I 23.14% (2,778,947 plus 2,400,000 Series B shares), Fund J 7.15% (1,600,000 common). (4) Fund I USD 6.24m (USD 3.84m Series A plus USD 2.4m Series B); Fund J none. (5) It makes existing investors support the company in a bad round or give up their protection, so the new lead does not fund the company while non-participating holders keep senior rights; the risk is that an investor who cannot or will not invest becomes a disgruntled common holder, and that the recapitalisation affects relationships and signalling to future investors. (6) Examples: which shares count toward the pro rata requirement and whether affiliates can take it up; whether the conversion to common needs a class vote and whether the charter amendment can be approved without the non-participating holder.

Self-test.

1. Cash flow: liquidation preference, participation, dividends, anti-dilution, redemption. Control: board seats, protective provisions, drag-along, information rights.
2. Non-participating preferred takes the larger of its preference and its as-converted share. Participating preferred takes its preference and then also its as-converted share of what remains.
3. A smaller $A$ makes the ratio $(A+B)/(A+C)$ further below one, so the conversion price falls more.
4. $B$ = 1,000,000, $C$ = 2,000,000; $CP_2$ = USD 1.8333 (=2*(10000000+1000000)/(10000000+2000000)); 1.0909 common shares per Series A share (=2/1.8333).
5. USD 3.0m (=10000000*6%*5).
6. 1.5 (=1.2/0.8).
7. At USD 400m the Series C's as-converted share (USD 72.5m) exceeds its USD 63m cap, so it converts and is treated like common under both term sheets.
8. Existing investors must invest their pro rata share in a new round or lose rights (often by conversion to common); it protects the new lead and the investors who do support the company.
9. Board representation lets it influence decisions and monitor directly, which can be worth more than contractual protection; Bengtsson and Sensoy (2011) find this pattern for more experienced investors.
10. Examples: a full ratchet, large cumulative dividends or redemption rights, broad series vetoes, participation with a high multiple.

Revision history

Standard and licence note

Structure aligned with the publicly available NVCA model legal documents (revision dates checked October 2026) and the venture contracting literature listed above (Kaplan and Stromberg 2003; Hellmann 1998; Gornall and Strebulaev 2020). The text, examples, numbers and questions are original; no model document, practitioner book or published case is copied or paraphrased, and Corvane Robotics, Start-up Q, Company R, Fund I and Fund J are fictional. The template is independent and not affiliated with or endorsed by the NVCA, any business school, law firm or investor. Check the current version of any model document and take legal and tax advice before you rely on it. Template licence: MIT.