Term Sheets & Cap Tables Fundamentals
"Term Sheets & Cap Tables Fundamentals" refers to the essential principles of two key documents in startup financing. A term sheet outlines the main terms and conditions of an investment agreement between founders and investors, such as valuation, ownership, and investor rights. A cap table, or capitalization table, is a spreadsheet that details a company’s ownership structure, showing how shares are distributed among founders, employees, and investors. Understanding both is crucial for managing equity and investment negotiations.
Term Sheets & Cap Tables Fundamentals
"Term Sheets & Cap Tables Fundamentals" refers to the essential principles of two key documents in startup financing. A term sheet outlines the main terms and conditions of an investment agreement between founders and investors, such as valuation, ownership, and investor rights. A cap table, or capitalization table, is a spreadsheet that details a company’s ownership structure, showing how shares are distributed among founders, employees, and investors. Understanding both is crucial for managing equity and investment negotiations.
💡 Key Takeaways
- Understand what a term sheet is and the main terms it sets (valuation, ownership, investor rights) in a startup investment.
- Learn what a cap table tracks (founders, investors, option pool, warrants) and how it shows ownership and dilution over time.
- Differentiate pre-money versus post-money valuations and how they affect founders' and investors' stake after each round.
- Recognize common term sheet provisions (liquidation preferences, anti-dilution, vesting, board rights, option pool) and how they influence control and economics.
❓ Frequently Asked Questions
What is a term sheet and why is it important?
A term sheet is a concise, non-binding outline of key investment terms (valuation, amount, ownership, investor rights) that guides negotiations before a formal agreement.
What is pre-money vs post-money valuation, and how does it affect ownership?
Pre-money is the company’s value before the investment; post-money is pre-money plus the new money. Investor ownership equals the investment divided by the post-money valuation (e.g., $5M in a $15M post-money deal = ~33%).
What is a cap table and what does it include?
A cap table lists all equity securities (common, preferred, options, warrants) and shows who owns what, how much, and how ownership would change with future issuances or exercises.
What are common rights in a term sheet that affect control or risk?
Common terms include liquidation preferences, anti-dilution protections, board or control rights, veto rights on major actions, and vesting schedules for founders and employees.