The Friendly Term Sheet
The valuation looks generous. The two clauses under it quietly take back the win. You're on the call before signature.
You're advising Marcus, founder of Fernway, a logistics-scheduling SaaS with 7 months of runway. Baseline Partners just sent a Series A term sheet at what Marcus calls "a great number" — an $18M pre-money valuation for a $6M investment. Marcus wants to sign this week. Before you say anything, you read the term sheet line by line.
Current cap table (fully diluted, pre-financing): 10,000,000 shares — founders hold 8,000,000 (80%), seed investors hold 1,400,000 (14%, converted from a prior SAFE), and an existing unallocated option pool holds 600,000 (6%).
What the term sheet actually says:
| Term | As written |
|---|---|
| Investment | $6,000,000 |
| Pre-money valuation (headline) | $18,000,000 |
| Post-money valuation | $24,000,000 |
| Baseline's resulting stake | 25% |
| New unallocated option pool | 20% of the post-money cap table, created out of the pre-money (up from today's 6%) |
| Liquidation preference | 1x, fully participating, uncapped |
| Board | 2 Baseline seats, 1 founder seat, 2 independent seats Baseline nominates |
Run the cap table: because the new 20% option pool is carved out of the pre-money instead of shared pro-rata, founders drop from 80% to 44% ownership at closing — before a single dollar of exit proceeds is split. Baseline's own stake stays a clean 25%; the entire cost of the oversized pool lands on the founders and seed investors.
Then there's the liquidation preference. "Fully participating, uncapped" means Baseline gets its $6M back first, and then still takes 25% of whatever's left, with no ceiling — the so-called double dip. At a decent-but-not-huge $30M exit: Baseline collects $6M off the top, plus 25% of the remaining $24M ($6M), for a $12M total. Under a standard 1x non-participating structure, Baseline would simply take the better of the $6M preference or its 25% as-converted share ($7.5M) — meaning common shareholders would split $22.5M instead of $18M. That's $4.5M pulled from founders, employees, and seed investors, on the exact same $30M outcome, from one clause.
Marcus doesn't plan to have his lawyer look at this until after verbal agreement — he's worried pushing back will kill the deal.
Data snapshot
Marcus asks: "The valuation is good, right? Should I just sign?" Write your answer. Take a clear position on whether Marcus should sign as drafted, name the two specific clauses doing the damage (the pre-money option pool shuffle and the uncapped fully participating preference) with the actual numbers, and state the specific counter-terms you'd have Marcus take back to Baseline — including how you'd size the option pool and what liquidation structure you'd propose instead.
Rubric
- Clear verdict. Takes an unambiguous position that Marcus should not sign as drafted, stated early, without hedging that 'a great valuation' settles the question.
- Diagnoses the option pool shuffle. Explains that carving the 20% pool from the pre-money (rather than sharing dilution pro-rata or sizing it post-closing) is what drops founders from 80% to 44%, and that the headline $18M pre-money is misleading as a result.
- Diagnoses the participating preferred. Explains the double-dip mechanics of fully participating, uncapped preferred and quantifies the effect with the $30M exit example (or equivalent math) — not just 'participating preferred is bad.'
- Concrete counter-terms. Proposes specific replacement terms: a pool sized to an actual hiring/option budget (e.g. ~10%), pool dilution shared pro-rata or added post-money, and preference converted to standard 1x non-participating (or capped participation at most).
- Handles the founder. Addresses Marcus's fear that pushing back kills the deal — explains why these are standard, biddable points with a reputable investor, without being naive about negotiation leverage or bridge-burning.