Term sheets and priced rounds
How to Read a Seed Term Sheet: Every Clause and What Is Market in 2026
The short answer
A term sheet sets two things: economics (valuation, price per share, option pool, liquidation preference, dividends, anti-dilution) and control (board seats, protective provisions, drag-along, investor rights). In 2025-2026 the market seed or Series A deal is a 1x non-participating liquidation preference, non-cumulative dividends, broad-based weighted average anti-dilution, one investor board seat with founders keeping control at seed, a short list of protective provisions voted by all preferred together, and a 30 to 60 day no-shop. Most of the term sheet is non-binding; confidentiality, no-shop and governing law usually are binding.
Key numbers
| Term or metric | 2025-2026 data | Source |
|---|---|---|
| 1x liquidation preference | 95.8% of deals | Cooley, Q2 2026 (166 deals, all stages) |
| Non-participating preferred | 96.4% of deals | Cooley, Q2 2026 |
| Accruing (cumulative) dividends | 3% of deals | Cooley, Q2 2026 |
| Pay-to-play | 8.4% of deals | Cooley, Q2 2026 |
| Redemption rights | 5.4% of deals | Cooley, Q2 2026 |
| Median seed round / valuation (software) | $4.1M / $24.3M | Carta, six months to July 2026 |
| Median Series A round / valuation (software) | $14.4M / $80M | Carta, six months to July 2026 |
| Median dilution, priced seed | 19.5% | Carta, 2025 |
| Median seed-stage option pool | 11.8% | Carta, 2025-2026 |
Economics
Amount, security and pre-money valuation
The term sheet names the security (for example "Series Seed Preferred Stock"), the total amount, the lead investor's commitment and the pre-money valuation. Always confirm whether a valuation is pre-money or post-money: "$4M at $20M" can mean 20% or 25% dilution. Good term sheets state both and attach a pro forma cap table.
Price per share
The price per share is the pre-money valuation divided by the pre-money fully diluted capitalization, which normally includes all issued shares, all outstanding options, the unissued pool, any pool increase required by the investor and all SAFEs and notes converting in the round.
Pre-money valuation: $16,000,000. New money: $4,000,000 (post-money $20,000,000; investors buy 20%). Existing shares: founders 8,000,000; pool required after closing: 10% of post-money; no SAFEs.
- Post-closing shares T = 8,000,000 / (1 - 0.20 - 0.10) = 11,428,571
- Investor shares = 20% x T = 2,285,714
- Price per share = $4,000,000 / 2,285,714 = $1.75
- Pool = 1,142,857 shares, created before closing and counted in the pre-money
- Founders after closing: 8,000,000 / 11,428,571 = 70.0%
Because the pool is inside the pre-money, the founders' "effective" pre-money is $16M minus the pool's value at $1.75 ($2.0M), or $14.0M. See the option pool shuffle.
Option pool
"Unissued employee pool of X% post-closing" is one of the most negotiated lines because it is effectively a price term. Ask for a pool sized to a 12 to 18 month hiring plan.
Liquidation preference
Market: 1x non-participating, meaning on a sale investors get the greater of their money back or their as-converted share. Participating preferred and multiples above 1x are off-market in most 2026 seed and Series A deals. See liquidation preference explained.
Dividends
Market: non-cumulative, paid only "when, as and if declared" by the board, usually at a stated rate such as 6% to 8%. Cumulative or accruing dividends add to the preference every year and appear in only about 3% of deals.
Conversion and automatic conversion
Preferred converts into common 1:1 at the holder's option, and automatically at an IPO or by vote of the required preferred holders. Founder point: one threshold for all series.
Anti-dilution
Market: broad-based weighted average, with standard carve-outs (pool grants, conversions, acquisitions, bank and lease financing). Full ratchet is off-market. See anti-dilution.
Redemption and pay-to-play
Both are uncommon (5.4% and 8.4% of deals). Redemption lets investors demand their money back after a period, often five years; resist it at seed. Pay-to-play penalizes investors who do not participate in future rounds and appears more often in down-round markets.
Control
Board of directors
Market at seed: often no investor seat for small rounds, or one investor seat on a board of three that founders control. At Series A: commonly one seat for the lead on a board of three or five, with common keeping a majority or an independent seat agreed by both sides. See board composition.
Protective provisions
A list of decisions that require approval of a majority (or a defined percentage) of the preferred stock: changing preferred rights, creating senior securities, selling the company, changing board size, paying dividends, taking on significant debt. Market: a short list, with all preferred voting together as one class. See protective provisions.
Drag-along
Requires stockholders to vote for a sale approved by the board, the required preferred and usually a majority of common held by founders or service providers. See drag-along, ROFR and co-sale.
Investor rights
- Information rights for "major investors" (a threshold such as $250K or more at Series A, often lower at seed): annual and quarterly financials, an annual budget.
- Pro rata right to buy a share of future rounds for major investors. See pro rata and information rights.
- Registration rights: standard NVCA terms for a future IPO. Low priority; do not spend legal fees here.
- ROFR and co-sale on founder transfers.
Founder matters
- Vesting: existing founder vesting continues, or a new schedule with credit for time served. See founder vesting.
- CIIAAs from all current and former employees and consultants.
- Founder activities: full-time commitment, outside roles disclosed.
Deal terms
- No-shop: 30 to 60 days of exclusivity. Ask for it to end if the investor stops working on the deal.
- Legal fees: the company pays the lead investor's counsel, capped (often around $25K to $50K at seed, more at Series A), payable only at closing.
- Conditions: satisfactory diligence, definitive documents, management rights letter for fund investors.
- Binding provisions: confidentiality, no-shop, fees, governing law.
Red flags in a seed term sheet
- Valuation stated without saying pre-money or post-money.
- Liquidation preference above 1x, or participating preferred.
- Cumulative dividends, redemption on a "material adverse change", full ratchet anti-dilution.
- Investors controlling the board at seed.
- Separate class votes for each series, or vetoes over budgets, hiring and salaries.
- A full re-vest of founders who have worked for years.
- A no-shop signed while the investor still needs "partnership approval".
- Personal guarantees or "non-dilution" rights that guarantee a fixed percentage.
Frequently asked questions
Is a term sheet legally binding?
Mostly no. The economic and control terms are a non-binding statement of intent. Confidentiality, exclusivity (no-shop), expenses and governing law are usually binding, so read those before signing.
What is the most important clause in a seed term sheet?
Valuation and option pool together determine price; liquidation preference and board composition determine who gets paid and who decides. Founders should focus on those four.
What liquidation preference is market in 2026?
1x non-participating. Cooley reported 95.8% of Q2 2026 deals with a 1x preference and 96.4% with non-participating preferred.
How long is a typical no-shop?
Thirty to sixty days. Shorter is better for the company, and it should terminate early if the investor walks away.
Who pays the investor's legal fees?
Customarily the company, from the round proceeds, subject to a cap and only if the deal closes.
Should I sign a term sheet without a lawyer?
It is possible, but founders who negotiate alone often accept off-market control terms that carry into every later round. At a minimum, have the term sheet reviewed clause by clause before you sign the no-shop.