Reading a term sheet, line by line
A walk through the sections of a published model term sheet for a priced round, what each part is for, and the questions to ask your own counsel about it.
This article is general information, not legal or financial advice. It was written on October 10, 2026, describes a public model document, and does not describe any agreement with World Enterprise. A real term sheet is negotiated and differs from the model. Ask your own lawyer to read the one you are offered.
A term sheet is the short document an investor sends before the long legal papers exist. A first-time founder often receives one with a deadline and little context. This article walks through the sections of one published model, in the order the model puts them, and says what each section is for and what to ask about it. It is a reading guide. It does not say which terms are fair, and it does not tell you what to sign.
Where the model comes from
The National Venture Capital Association publishes a model term sheet for a Series A preferred stock financing, and a set of model legal documents that go with it. The association says the documents avoid bias toward the investor or the company and present options reflecting a variety of financing terms. Its own disclaimer says each document is a starting point that should be tailored and is not legal advice.
The model sheet is organized by the legal document in which each term is found, and its authors say it is somewhat longer than a typical term sheet. Square brackets in the model mark blanks and alternatives. A term sheet you receive will have the brackets filled in. The model’s own preliminary note says deal terms often are negotiated further between the term sheet and closing, so the sheet is a starting point and not a final answer.
What the document binds you to
Start with the opening paragraph, because it says what the sheet does and does not do. In the model, the no-shop and confidentiality provisions are binding whether or not the financing closes. No other legally binding obligations are created until definitive agreements are signed and delivered by all parties. The model also says the sheet is not a commitment to invest and is conditioned on the conditions to closing it lists.
Read that as two facts. The investor is not yet bound to fund. You may already be bound not to talk to anyone else.
The sections, in order
| Section of the model | What it covers |
|---|---|
| Offering Terms | The security, the closing date and conditions, who invests, the amount raised and the pre-money valuation |
| Charter | Dividends, liquidation preference, voting, protective provisions, conversion, anti-dilution, mandatory conversion, and optional pay-to-play and redemption terms |
| Stock Purchase Agreement | Representations and warranties, and who pays legal costs |
| Investors’ Rights Agreement | Registration rights, information rights, a right to join future rounds, and matters needing a director’s approval |
| Right of First Refusal and Co-Sale Agreement | What happens when an employee holding a large stake wants to sell |
| Voting Agreement | Board composition and a drag-along |
| Other Matters | Founders’ stock, no-shop, expiration |
Offering Terms: price, closing and the option pool
The security is the class of shares the investor buys. In the model it is Series A Preferred Stock, and the price per share is called the Original Purchase Price. The model sets that price from a fully diluted pre-money valuation, a value for the company before the new money.
One phrase deserves your full attention. The model says the pre-money valuation includes an employee option pool, which it brackets as unallocated and uncommitted, stated as a share of the post-money capitalization. The pool is counted inside the pre-money figure, not added on top of it. Ask for the pool’s size and for the hiring plan behind it.
Look also at the conditions to closing. The model lists satisfactory financial and legal due diligence among them. A term sheet that is signed but conditional on diligence is not a closed deal, and the data room guide shows what that diligence will look for. The model’s amount-raised line also contemplates SAFEs and bridge notes converting into the round, so read the SAFE guide before the sheet arrives.
The Charter: who gets paid first, and who decides
The Charter terms set the rights of the new shares against the common stock the founders hold.
- Dividends. The model offers alternatives: dividends paid with common stock as converted, non-cumulative dividends when and if the board declares them, or a cumulative annual dividend.
- Liquidation preference. The model offers three alternatives: a non-participating preference, in which the investor takes its preference or its as-converted amount, whichever is greater; a fully participating preference, in which the investor takes the preference and then shares in the rest with common stock; and a participating preference with a cap. Each pays a stated multiple of the Original Purchase Price first. The alternatives differ in what is left for common stock once that is paid.
- Deemed liquidation event. A merger, or a sale or exclusive license of all or substantially all assets, is treated as a liquidation event, so the preference applies on a sale and not only on a shutdown.
- Voting and board seats. The preferred shares vote with common on an as-converted basis, except for board seats they elect, matters required by law, and protective provisions.
- Protective provisions. A list of company actions that need the written consent of the holders of the required share of the new preferred stock, listed in the model as including a liquidation or sale, a change to the Charter, creating some new classes of securities and creating debt.
Debt is on the list. A company that later wants a loan may need the investors’ consent, so ask your counsel how that clause would apply. The founder time budget of a raise is worth reading too, because the negotiation that follows a sheet takes time.
Conversion, anti-dilution and the rest of the Charter
Optional conversion lets the holder turn preferred into common, initially one for one. Mandatory conversion turns every preferred share into common on a qualifying underwritten public offering or on the written consent of the required holders. The anti-dilution clause adjusts the conversion price if the company later sells shares at a lower price, and the model gives a formula for it along with customary exceptions, such as shares issued to employees under a board-approved plan.
Two further clauses appear in square brackets, which means the model treats them as optional. Pay-to-play requires holders to buy their share of a later down round or lose preferred rights. Redemption lets the required holders ask the company to buy their shares back after a period. If a term sheet contains either, ask what triggers it and what it would cost the company.
The other agreements
- Stock Purchase Agreement. The company gives standard representations and warranties customary for its size and industry. The model has the company pay the legal costs of the financing, including reasonable fees of investor counsel, with a bracketed cap on those fees.
- Investors’ Rights Agreement. Registration rights say when investors can require the company to register their shares for sale. Information rights entitle a major investor to financial statements, an annual budget and, in a bracketed item, an up-to-date capitalization table. A right to join future rounds lets major investors buy their share of later issuances.
- Right of First Refusal and Co-Sale. The company, then the investors, may buy shares an employee holding a large stake proposes to sell, and investors may sell alongside.
- Voting Agreement. It fixes the makeup of the board and includes a bracketed drag-along that requires listed holders to vote for a sale that meets the approvals the clause lists.
Pro rata, in a financing, means in proportion to what a holder already owns. A right to participate pro rata in a future round lets an investor take part in the new shares in proportion to its existing percentage of the company. The model sheet describes this right for major investors and adds that, if one declines, the others may buy the remainder.
Other Matters: vesting, no-shop and expiry
The model has a bracketed term for founders’ stock, a buyback right or vesting that lapses in increments over time. It also has a no-shop under which the company and founders will not solicit or encourage competing proposals for a stated number of days. Finally, it has an expiration date after which the sheet lapses if the company has not accepted it. Ask how long the no-shop runs, and what happens to it if the investor loses interest.
Questions to bring to your own counsel
- Which terms in this sheet differ from a standard model, and what does each difference do to my ownership and my control?
- How would the proceeds divide in a sale at a low price and at a high price, under the preference as written?
- How large is the option pool, and is it counted before or after the new money?
- Which company actions need investor consent, and does that include borrowing?
- What binds me today, and until when?
- Which of the questions in questions to ask your counsel before you sign apply here?
- What does the investor readiness checklist say I should have prepared before diligence starts?
What this article cannot tell you
This article cannot tell you whether any term is fair or usual, what an investor will accept, or how a particular term sheet will be read. It describes one model published by the National Venture Capital Association for a Series A financing, with Delaware shown in brackets as the state of incorporation. The term sheet file that was read sits at an address dated 2020, and the association’s page lists legal documents updated as recently as June 2026, which this article did not read. It does not cover tax, state or non-US law, or earlier-stage financings that use other instruments. Nothing here is a recommendation of an investor, a lawyer or a platform.
In the data
These figures describe U.S. businesses in general, not WE’s results. Each one names its source.
Show the data as a table
| Round | Median dilution |
|---|---|
| Seed | about 19% |
| Series A | about 18% |
| Series B | about 13% |
| Series C | about 9.5% |
| Series D | about 4.9% |
Quoted one by one from the publisher’s report; the figures are approximate as printed.
Source: Carta, State of Private Markets: Q1 2026 , 2026-05-29
Retrieved 2026-10-15. Single figures quoted from the report as printed; no dataset is re-hosted.
Sources
- NVCA model term sheet for a Series A preferred stock financing, National Venture Capital Association . Accessed October 10, 2026.
- Model Legal Documents, National Venture Capital Association . Accessed October 10, 2026.
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