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Do not accept a venture-capital offer because its headline valuation looks attractive. Treat it as a package of price, dilution, liquidation economics, control, founder-equity rules, investor rights, funding conditions and the investor’s strategic fit. Ask the questions below, model the answers from the actual draft documents, and have independent venture-financing counsel review the transaction in the company’s jurisdiction before signing.
Start with the complete deal, not the headline valuation
A term sheet is an outline of a financing, not a complete description of the company’s obligations after closing. The binding economics and operating rules are spread across the term sheet and definitive agreements. A lower valuation can sometimes leave founders with better downside protection or more practical control; a higher valuation can be offset by a larger option pool, stronger investor preferences or restrictive consent rights.
Use one written comparison for every offer. Keep the assumptions identical: the amount raised, pre- and post-money capitalization, option-pool size, treatment of existing and new shares, expected timing of each funding instalment, and a set of possible exit values. Then ask counsel to check whether the drafted documents produce the result shown in your model.
1. What exactly are the round’s economics?
How much is being raised, and at what price?
Confirm the gross amount, security being issued, price per share or conversion basis, and the valuation definition used in the documents. “Valuation” may refer to a pre-money or post-money figure, and the difference changes the ownership percentage implied by the same cheque. Ask for a fully diluted capitalization table that identifies founders, existing investors, the employee option pool, promised grants and the new securities.
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- Is the stated valuation pre-money or post-money?
- Which shares and options are included in the denominator?
- Are convertible notes, warrants or other instruments included in the calculation?
- What ownership percentage does the investor receive immediately after closing?
- Is any part of the round reserved for a later close?
Have counsel reconcile the term sheet’s percentages with the stock-purchase and capitalization documents. A percentage that looks precise in a presentation can change when the option pool or outstanding convertibles are counted.
Who bears the option-pool dilution?
Ask whether the employee option pool is increased before or after the new money is priced. If the pool is created or enlarged before the investment, existing holders generally absorb that dilution; if it is increased after the investment, the investor and existing holders share it according to the final capitalization. The documents, not a verbal explanation, determine the result.
Request a before-and-after table showing founder ownership, each existing investor’s ownership, the new investor’s ownership and the remaining unallocated pool. Include any pool top-up required at closing and any future grants that the investor expects the board to approve.
What happens in a sale, liquidation or down round?
Read the liquidation-preference and conversion provisions line by line. Ask whether the preferred security receives a return before common shareholders, whether that return is participating or non-participating, whether it is multiple or single, and how accrued dividends or other amounts are treated. Do not assume a particular formulation is universal; negotiated language can materially change the proceeds available to founders.
Ask when preferred shares may convert to common shares, who can elect conversion, and whether conversion is automatic in specified transactions. Model at least three outcomes from the drafted documents:
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- A modest sale in which the preference is important.
- A strong sale in which conversion may produce more than the preference.
- A failed or down-round scenario in which little value remains for common stock.
Include future financing, additional option grants and transaction costs in the model where the documents require them. The purpose is not to predict an exit; it is to see how the agreed waterfall allocates each outcome.
2. Who controls decisions after closing?
How is the board composed?
Ask who appoints each director, how many seats exist, whether founders retain a seat, and what happens if an appointing party no longer owns a specified amount of stock. Board composition determines who oversees budgets, senior hiring, future financing, acquisitions and a possible sale. UK government term-sheet guidance describes board composition as the way control and oversight are shared and lists it among the key points founders should examine. Read that guidance in its UK context rather than treating it as U.S. law: GOV.UK’s “Track 2: Term Sheet Key Points and Guardrails”.
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- Can an investor replace its director without a founder vote?
- What quorum and voting thresholds apply?
- Are observer seats available, and what confidential information may observers receive?
Which actions require investor consent?
List every protective provision in the charter, voting agreement and related documents. Typical categories can include issuing senior securities, changing the charter, taking on substantial debt, selling the company, changing the business, paying dividends or approving a merger. The important question is scope: does consent apply only to extraordinary transactions, or can it reach ordinary operating decisions such as hiring, budgets, pricing or contracts?
Ask who holds the consent—the named investor, a majority of the preferred shares, a class vote or a board-appointed director—and whether the right expires after ownership falls below a threshold. A right that appears narrow in a summary can be broad in operative language. Request a schedule of all vetoes, the triggering threshold and the document in which each appears.
3. What happens to a founder’s equity if the founder leaves?
Vesting, repurchase and forfeiture
Find the exact vesting schedule for founder shares and any new equity. Ask how much is vested at closing, what event starts the vesting clock, and whether the company may repurchase unvested shares. Determine the price and procedure for that repurchase and whether the company, investors or another party may exercise it.
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Do not treat “four-year vesting” or another shorthand as a complete answer. The agreement may contain a cliff, acceleration on a sale, acceleration on termination, or different treatment for shares issued at different times. Ask counsel to mark every event that changes the amount the founder keeps.
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Good-leaver and bad-leaver consequences
Ask how the documents define resignation, termination for cause, termination without cause, disability, death and a negotiated departure. Determine whether vested shares remain with the founder, may be repurchased, or are subject to a different price. Check whether unvested shares are cancelled or repurchased and how the company values vested shares.
Also ask what happens if the founder is removed after a disagreement, becomes unable to work, or leaves shortly before a sale. The commercial effect can be substantial, and leaver provisions are not interchangeable across transactions. Obtain a written example from counsel for each departure scenario rather than relying on a label in the term sheet.
4. What continuing rights do investors receive?
Read the Investors’ Rights Agreement and all related instruments, not just the summary. Continuing rights can determine the information the company must provide, an investor’s ability to participate in later rounds, registration arrangements and other obligations. Ask:
- What financial statements, budgets, forecasts and operational reports must be delivered, and how often?
- Which investors may participate in future financings to maintain their ownership?
- Are there registration or resale rights, and who pays the related expenses?
- Do confidentiality, inspection or reporting duties continue after an investor’s ownership declines?
- Are there rights of first refusal, co-sale or transfer restrictions affecting founder shares?
Map each right to its document, beneficiary, ownership threshold, notice period and termination condition. A term sheet may mention a right without specifying the procedures that make it workable.
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5. When will the company actually receive the money?
Closing conditions and diligence
Ask for a single list of every condition to the initial closing: legal, financial, technical, regulatory and corporate. Identify which conditions are objective and which depend on an investor’s satisfaction. Confirm who supplies each item, who decides whether it is complete, and whether a missed condition lets the investor walk away or delay funding.
Confirm the proposed signing and closing dates, the consequences of a delay, and whether the investor may terminate during an extended period. Separate a signed commitment from cash in the company’s account; they are not the same event.
Tranches and milestones
Some financings release capital in time-based or milestone-based tranches. Ask how much is available at each closing, the precise milestone definition, the measurement date, the evidence required and the person who determines whether it has been met. Ask what happens if the milestone is disputed, achieved late or becomes impossible because of an event outside the company’s control.
NVCA says its revised model documents include mechanics for tranche financings. That confirms the documents can address staged funding; it does not establish one universal tranche structure. The company should negotiate objective tests, notice procedures and a remedy for an unjustified refusal to release the next tranche.
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6. How should competing offers be compared?
Put every proposal into the same model and compare the full package. The following framework keeps a high valuation from hiding more consequential terms.
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| Comparison area | Questions to answer | Evidence to use |
|---|---|---|
| Valuation and dilution | What are pre-money and post-money values, the price per share, the option-pool treatment and the fully diluted ownership after closing? | Capitalization table, term sheet and stock-purchase documents |
| Downside economics | What preference, participation, conversion, dividend and anti-dilution mechanics apply in low, high and down-round outcomes? | Charter and financing agreements; counsel’s scenario model |
| Governance | Who appoints directors, sets quorum and controls board votes? | Charter, voting agreement and board provisions |
| Investor consents | Which actions need approval, who gives it, and when do the rights expire? | Protective provisions and related agreements |
| Founder equity | What vests, what can be repurchased, and how are departure, disability, termination and a sale treated? | Founder stock and equity agreements |
| Continuing rights | What information, participation, registration, transfer and co-sale rights survive closing? | Investors’ Rights Agreement and transfer documents |
| Funding certainty | What conditions, milestones, tranches and termination rights affect when cash arrives? | Term sheet and closing provisions |
| Investor fit | Can this investor provide the expertise, introductions, follow-on capacity and working relationship the company actually needs? | Written commitments and references checked by the founders |
There is no single best column for every company. A founder who needs rapid hiring may value certainty of funding; another may prioritize retaining board control or reducing downside preference. Record the trade-off instead of ranking offers by valuation alone.
7. What documents and professional review are necessary?
Ask for the complete set of proposed documents and a redline of every material change. In the United States, the National Venture Capital Association (NVCA) publishes a model suite that includes a Certificate of Incorporation, Stock Purchase Agreement, Investors’ Rights Agreement, Voting Agreement, and Right of First Refusal and Co-Sale Agreement. Its current model-document page notes revisions reflecting legal changes and evolving norms, including updates listed in October 2025 and June 2026: NVCA model legal documents.
NVCA expressly cautions users: “Each document is intended to serve as a starting point only and should be tailored to meet your specific requirements.” That sentence is guidance about using model forms, not evidence that every financing uses identical terms. The actual negotiated documents and the law governing your company control.
Retain independent counsel experienced in venture financings and licensed for the company’s jurisdiction. Counsel should:
- reconcile the term sheet with the charter, purchase agreement and side letters;
- build an ownership and proceeds model from the drafted language;
- identify board, consent, information and transfer restrictions;
- test founder departure and change-of-control scenarios; and
- explain tax, employment, securities and cross-border consequences that depend on the company’s facts.
UK founders can use the GOV.UK guidance as a question list, but it is not a substitute for advice under UK law or the law governing the transaction. Founders elsewhere should obtain advice specific to their incorporation, investor and employee-equity jurisdictions.
A founder’s pre-acceptance checklist
- Collect the term sheet, capitalization table, charter drafts and every definitive agreement.
- Write down the amount, valuation basis, security, ownership and option-pool assumptions.
- Ask for a clause-by-clause schedule of liquidation, conversion and anti-dilution mechanics.
- Draw the post-closing board and list every investor-consent trigger.
- Calculate founder equity under continued employment, voluntary departure, termination, disability and a sale.
- List every information, participation, registration, transfer and co-sale right.
- Mark each closing condition, milestone, tranche amount, decision-maker and dispute remedy.
- Run the same low, base and high exit scenarios for every offer.
- Discuss investor fit, follow-on expectations and working style with references and the proposed board members.
- Have independent, jurisdiction-appropriate counsel explain the final documents before signing.
Accept only after you can explain, in plain language, how ownership, control, founder equity and cash timing change in both a successful exit and a difficult one. If an answer is not written into the operative documents, treat it as unresolved.
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