Price Is One Number. Control Is the Rest..

When a term sheet arrives, most founders look at one number first: the valuation. It is the number that ends up in the press release and the one your friends ask about. It is also the number that tells you the least about what your life will be like after you sign.

A term sheet is mostly about control. Who sits on the board, and how many seats does each side hold? Which decisions require the investor’s approval, such as raising more money, selling the company or changing the business? If the company is sold, who gets paid first? Does the investor have the right to put money into future rounds, and does that right shape who else can come in?

Two axes, not one number

Brad Feld and Jason Mendelson, who later co-founded Foundry Group, wrote that line when they began a blog series on term sheets in 2005. The series grew into their book Venture Deals. Economics is what the investor gets back. Control is what the investor can decide or veto. Their test for a negotiation is useful. If an investor digs in on a provision that touches neither, they wrote, the investor is “probably blowing smoke.”

Founders tend to negotiate economics hard and wave control through, because economics is easy to compare. Control is where the partnership actually lives. A lower valuation from a partner who leaves you room to run the company can be worth far more over the life of the business.

Read it as a list of permission slips

Passion dies under permission slips. Some term sheets are long lists of them. You do not need to become a lawyer to read one well. You need a good lawyer, and you need to read the document yourself with one question in mind.

When this company hits a hard quarter, who will be allowed to decide what happens next?

Taking a particular investor’s money is a one-way door. Once they are on your cap table, they are part of your company’s life through every round and every crisis. Give that decision the time a one-way door deserves.

Read your next term sheet

1. Sort every clauseMark each term E for economics or C for control. Expect most of the page to be C.
2. Run the hard-quarter testFor each control term, write down who decides what happens next when the company hits a hard quarter.
3. Count the permission slipsList every decision that will need someone else’s approval. Ask which ones you can live with for years.
4. Read it yourselfHire a good lawyer. Then read the whole document with the hard-quarter question in front of you.
5. Compare partners, not just pricesWeigh each offer on your freedom to run the company as well as on valuation.