Sample frameDay 298·Entrepreneurship · Terms

Morning. Two questions sit under every term sheet, and the valuation answers neither.

Entrepreneurship.

Economics and Control

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The question

If a term sheet landed this afternoon at a valuation that flattered you, would you know which clause decides what you personally receive when the company sells for less than the investors put in, and which one decides whether you can be replaced — or would you read the number, feel good, and forward the rest to a lawyer? The first sits under liquidation preference. The second is split between the board clause and the protective provisions, and neither is on the front page.

The idea

Brad Feld and Jason Mendelson run Foundry Group, a venture firm in Boulder, Colorado, and in 2011 they published Venture Deals — a book built on the observation that a founder negotiates a term sheet a handful of times in a life, against people who do it every week. Their organising claim is that however long the document runs, it's doing only two things. Economics: what everyone gets, and in what order, when there's money to divide. Control: who decides, and what they can stop. Valuation sits inside economics, but it's one term among many and rarely the decisive one. A liquidation preference sets who gets paid before you and how much; a participating preference lets the same money get paid twice. An option pool written into the pre-money valuation is dilution charged entirely to the people already on the cap table — you — while the headline number stays handsome. Protective provisions hand a minority investor a veto. A board seat decides who runs the place. Feld and Mendelson's practical conclusion is unglamorous: economics and control can be traded against each other, and a founder who argues only about price gives away the terms for nothing.

The framework

01
Sort every clause into one of two piles.
Take the sheet, work down it line by line, and mark each term E or C. Economics: valuation, liquidation preference, participation, anti-dilution, the option pool, vesting, pay-to-play. Control: board composition, protective provisions, drag-along, anything requiring investor consent. Almost every clause lands cleanly in one pile, and you'll be done inside twenty minutes. What that buys you is a position rather than a reaction — you can see which side of the sheet you're being squeezed on, and trade across the two piles deliberately instead of defending the only number you're sure you understand.
02
The preference decides the middling outcomes.
A liquidation preference says the investor's money comes back before yours when the company is sold. One times, non-participating, is the standard shape: they take their money back or convert and take their percentage, whichever is worth more. Participating preferred takes both — money back first, then a share of what's left. A multiple takes several times the cheque before anyone else moves. It doesn't matter much in a spectacular exit, and it doesn't matter at all in a total loss. It decides almost everything in between, which is where most companies actually end up.
03
Where does the option pool sit?
Investors will want an unallocated pool for future hires, and where it's created decides who pays for it. Placed inside the pre-money valuation, it dilutes the existing shareholders alone while the headline valuation stays intact. Placed after, everyone shares it. Size matters as much as placement: a pool built for a two-year hiring plan you don't have is a straight transfer of ownership dressed as prudence. Bring your own hiring plan to that conversation and size the pool from it, role by role, rather than accepting a round percentage.
04
Control is the part you can't buy back later.
Economics get renegotiated at the next round. Control doesn't. Protective provisions give holders of the preferred a veto over things you'd consider ordinary management — issuing shares, selling the company, changing what they hold. A board seat gives them a vote on who runs it. Both are reasonable asks and both are far stickier than price, because each new round layers another set on top of the last. Negotiate the thresholds while you still have leverage: which decisions genuinely need consent, and whether one investor can withhold it or only a majority of them.

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