Term-sheet negotiation conversation scripts

In this article

1. Before you start
2. Why interviewers ask this
3. Term-sheet negotiation from first principles
4. Worked example
5. Trade-offs and edge cases
6. How to answer it in an interview
7. Common mistakes
8. Follow-up questions
9. Sources

Before you start

This page is one step of the fundraising and investor conversations learning path. The scripts below are original wording written for this page and are illustrative: no source supplies negotiation phrasing. The facts they rest on come from the sources listed at the end. Those sources describe venture capital deals; term sheets in investment banking and private equity rounds use different documents, so check them separately. Related reading on valuation sits in valuation and dilution questions and in how to answer "what is your valuation?". The due-diligence questions and data room page covers what comes after the term sheet, and the investor Q&A prep sheet template helps you rehearse the answers.

Why interviewers ask this

The consequence of getting a term sheet wrong is paid years later, at an exit, which is why a question about one separates people who recite a vocabulary list from people who can protect a client or a company. The question as candidates report it is usually some version of "walk me through a term sheet and tell me what you would push back on."

A weak answer lists terms: valuation, liquidation preference, board seats. A strong answer says which terms are binding, why the headline valuation is not the price, and what to say about each lever. A Staff-level answer ties each clause to a number: it shows what an investor receives at a modest exit, not only at a failure or a triumph. This page gives you the sentences and the arithmetic to do that.

Term-sheet negotiation from first principles

Term sheet

A term sheet is a short, mostly non-binding document in which an investor sets out the main economic and control terms on which it proposes to invest, so both sides agree the outline before lawyers draft the long agreements. Only a few clauses, such as exclusivity and confidentiality, bind at signing.

Liquidation preference

A liquidation preference is the right of preferred shareholders to be paid a set multiple of their investment, or their as-converted share if that is larger, before or alongside common holders when the company is sold or wound up. Its two dials are the multiple and whether the holder also participates in what remains.

In plain words

Think of a term sheet as the offer letter on a house. It fixes price and conditions before the lawyers write the contract. The analogy breaks in one place. A house has one price. A term sheet has several levers. A concession on one lever can be worth more than the same concession on the headline price, so you must know which lever you are touching.

In one precise sentence, a term sheet negotiation is a sequence of trades over price, the share pool, payout priority, control and exclusivity, and a good script names the lever, asks one question and proposes one change.

Step 1: Open by asking what binds

The National Venture Capital Association (NVCA) model term sheet says its No Shop and Confidentiality provisions bind "whether or not the financing is consummated" (June 2013 version). The same form states that it "is not a commitment to invest" and is conditioned on due diligence. Signing therefore does not promise funding, and it does bind you to exclusivity. Only no-shop and confidentiality clauses bind in the NVCA form (and, where the bracketed option is kept, counsel and expenses).

The form's own footnote adds a warning: in some states, including Delaware and New York, a nonbinding term sheet can still create an obligation to negotiate in good faith. So do not treat it as free to walk away from.

Scripts (illustrative):

• "Before we go line by line, which parts of this document bind us today, and which wait for the final agreements?"
• "I can agree to exclusivity for a fixed, short period if we agree what each side delivers in it."

You now know what you are agreeing to when you sign. Next comes the price.

Step 2: Ask where the option pool sits

The pre-money valuation is the value placed on the company before the new money goes in, and the post-money valuation is that value plus the new money. In the NVCA form, the price is based on a fully diluted pre-money valuation that includes an employee pool stated as a percentage of the post-money capitalization. The pool therefore sits inside the pre-money, and current owners bear its dilution. The "option pool shuffle" is a price negotiation in disguise.

Take an illustrative round: 10 million dollars headline pre-money, 2 million raised, a 15% post-money pool. The post-money is 12 million, the pool is worth 1.8 million, and existing owners are effectively valued at 8.2 million (assuming no existing pool), not 10 million.¹

Scripts (illustrative):

• "Is the pool inside the pre-money number, and what percentage of the post-money does it assume?"
• "What hiring plan is that pool based on? I would like to size it to the plan and compare prices on the effective pre-money."

Scripts on the headline price and on pushback (illustrative):

• "Your 10 million headline is 8.2 million to us once the pool is counted. Can we compare offers on that effective number?"
• If another investor has made a proposal: "I have another proposal. Can you compare yours on effective pre-money, preference and pool, not only the headline?"
• If the answer is "we can't move on valuation": "Understood. Can the pool shrink, or sit in the post-money? On these numbers the pool is worth 1.8 million, so that is the same conversation as price."

Step 3: Ask for the standard preference

A liquidation preference has two dials: the multiple (one times, two times) and participation. The NVCA form offers three alternatives: non-participating, full participating, and participating up to a cap. Non-participating pays the greater of the preference or the as-converted amount, which Morrison Foerster calls simply "downside protection" and the most common type. Participating pays the preference and then also shares pro rata.

For scale, Hongkong and Shanghai Banking Corporation (HSBC) Innovation Banking reports that in 2025, 90% of preference shares in the United Kingdom were non-participating, and 96% of those had a one-times multiple. That is United Kingdom data, not United States data.

Scripts (illustrative):

• "Can we keep this at one times, non-participating? That is the form I understand to be most common."
• "If participation stays, can it be capped at a fixed multiple of the investment?"

Step 4: Trade control and exclusivity last

The remaining levers are separate from price. Protective provisions are actions that need the preferred holders' consent, board composition sets who decides, and anti-dilution protects the investor if a later round is cheaper. The NVCA form offers weighted-average protection (called "typical" there), full ratchet, or none. A full ratchet resets the conversion price to the new, lower price. The no-shop clause bars you from soliciting other proposals for a number of weeks that the form leaves blank, and the form calls break-up fees "unusual" in venture financings.

Scripts (illustrative):

• "Which protective provisions do you need, and can each have a defined scope?"
• "I would prefer broad weighted-average anti-dilution over a full ratchet."
• "Can we set the no-shop to a fixed number of weeks, with no break-up fee?"

1 · What binds2 · Option pool3 · Preference4 · ControlReplay

Step-by-step description

1. Ask which clauses bind today.
2. Ask where the pool sits.
3. Ask for the common preference.
4. Trade control and exclusivity.

• Only no-shop and confidentiality clauses bind in the NVCA form (and, where the bracketed option is kept, counsel and expenses).
• The option pool sits inside the pre-money, so existing owners bear its dilution.
• A one-times non-participating preference is the most common type.

Worked example

The numbers below are illustrative inputs; the outputs follow by arithmetic.¹ An investor puts 2 million dollars into a company for 20% post-money, so the post-money is 10 million. Compare three preference types at three exit values.

With non-participating preferred, the investor takes the greater of 2 million and 20% of the exit.

At a 5 million exit that is 2.0 million, at 10 million it is 2.0 million, and at 50 million it converts to common and takes 10.0 million. With full participation, the investor takes 2 million first and then 20% of the remainder: 2.6 million at 5 million, 3.6 million at 10 million and 11.6 million at 50 million. At a 10 million exit, full participation pays the investor 3.6 million against 2.0 million for non-participating. At a 50 million exit, full participation pays 11.6 million and the other two pay 10.0 million. With participation capped at two times, the investor's total is limited to 4 million unless converting pays more: 2.6 million, 3.6 million and 10.0 million.¹

The conversion crossover for non-participating preferred is the investment divided by the ownership: 2 million ÷ 20% = 10 million. Below it the preference matters, which is why it is not only a failure term. For the capped version the investor converts above 20 million.

The table covers three separate illustrative scenarios, each named in its row labels: the pool example, the preference example and the anti-dilution example. They are not one deal.

Text description of the diagram

• At a 10 million exit, full participation pays the investor 3.6 million against 2.0 million for non-participating.
• At a 50 million exit, full participation pays 11.6 million and the other two pay 10.0 million.

Anti-dilution works the same way by arithmetic. Say 2 million dollars of Series A shares were bought at a price of 1.00 per share with 10,000,000 shares outstanding, and a down round raises 1 million dollars at a price of 0.50 per share (illustrative).

The weighted-average formula in the NVCA form is the new conversion price equals the old price times (A plus B) divided by (A plus C), where A is the shares outstanding, B the shares the new money would buy at the old price and C the shares actually issued. That gives a conversion price of 0.9167 per share, so the Series A converts into 2,181,818 shares. A full ratchet resets the price to 0.50 per share and converts into 4,000,000.¹

Trade-offs and edge cases

Each script trades goodwill for terms, so pick the levers that matter. A higher headline valuation is not automatically a better deal: the pool inside the pre-money and a participating preference both change the economics, as the example shows.

The figure below compares the three preference types by payout rule and founder view.

Text description of the diagram

• Non-participating preferred pays the greater of the preference or the as-converted amount.
• Participating preferred pays the preference and then shares pro rata.

Edge cases:

• A Simple Agreement for Future Equity (SAFE) is a short contract an investor signs to fund a startup now in exchange for the right to shares later. Y Combinator says usually the only term to negotiate is the valuation cap. On a post-money SAFE, ownership sold is the investment divided by the cap: a 1 million dollar raise for 15% implies a post-money cap of about 6.7 million.
• The form may have moved. The only full NVCA text read for this page is the June 2013 version; the current forms are on the NVCA model legal documents page, so check the clause wording there before quoting it as current.
• Market defaults differ by place and year. The only frequency data here is from the United Kingdom, so a United States claim about "market" needs its own source.
• Good faith can bind. A duty to negotiate in good faith can arise even where the document says it is nonbinding.

How to answer it in an interview

The spoken structure: say what binds, say the price is net of the pool, give the preference with a number, then trade control and exclusivity.

Common mistakes

• "A signed term sheet means the money is coming." (wrong) The NVCA form says it is not a commitment to invest. (right) "It is conditioned on diligence and final agreements."
• "A term sheet is entirely nonbinding." (wrong) Exclusivity and confidentiality bind, and a good-faith duty can arise. (right) "Mostly nonbinding, with a few binding clauses."
• "The higher valuation wins." (wrong) The pool and preference change the real economics. (right) "I compare effective pre-money and payout at modest exits."
• "Liquidation preference only matters if the company fails." (wrong) It sets the crossover, which in the example is 10 million. (right) "It matters in modest exits too."

Follow-up questions

Is a term sheet legally binding?

Mostly not: in the NVCA form only no-shop and confidentiality (and, in brackets, expenses) bind. Even so, some states can imply a duty to negotiate in good faith, so it is not risk-free.

What is the option pool shuffle?

It is placing a large pool inside the pre-money so existing owners bear its dilution, which lowers the effective price. Ask where the pool sits and how big it is as a share of the post-money.

What is the difference between participating and non-participating preferred?

Non-participating pays the greater of the preference or the as-converted amount. Participating pays the preference and then also shares in the remainder pro rata, which in the example pays 3.6 million against 2.0 million at a 10 million exit.

What does a SAFE valuation cap mean for ownership?

On a post-money SAFE, ownership sold is the investment divided by the cap, so a 1 million dollar raise at a roughly 6.7 million cap sells about 15%. Raising less on the same cap sells less.

Is it normal to ask for changes to a term sheet?

Yes. The form itself is a template with blanks for the multiple, the pool and the no-shop period. A calm, specific request on one lever at a time works best.

Sources

1. NVCA Model Term Sheet, Series A Preferred (June 2013 version, hosted copy) — National Venture Capital Association (via RWTHx on edX), 1 Jun 2013
2. Model Legal Documents — National Venture Capital Association, 26 Oct 2026
3. The SAFE — Y Combinator, 26 Oct 2026
4. Ask a MoFo: Common Provisions in Venture Capital Term Sheets: Liquidation Preference — Morrison Foerster, 26 Oct 2026
5. A deep dive into term sheet liquidation preferences — HSBC Innovation Banking, 26 Oct 2026