I wrote my first angel check in 2006. Back then, I thought I was pretty smart. I’d read all the books, and I understood the basics of a term sheet. Or so I thought. Eighteen years, two exits, and over 200 investments later, I can tell you this: my early understanding of term sheets was a joke. The real lessons aren’t in the textbooks. They’re learned in the trenches, in late-night negotiations, and in the bitter aftermath of deals gone wrong.
Here are the 14 things I wish I’d known about term sheets when I started out. These are the lessons that have saved me—and made me—millions.
1. Valuation is a vanity metric. Liquidation preference is sanity.
Everyone gets hung up on the valuation. Founders want the highest number to brag about, and new investors think a low valuation means they’re getting a good deal. But the truth is, the pre-money valuation is just one piece of the puzzle. The real killer is the liquidation preference.
I once invested in a company with a monster valuation. I was so excited. Then, a few years later, the company sold for a disappointing price. I thought I’d at least get my money back. Nope. The later-stage investors had a 3x participating preferred liquidation preference. They got three times their money back before I saw a dime. I got wiped out.
Lesson learned: a high valuation with a nasty liquidation preference is a trap. I’d rather have a lower valuation with a clean, 1x non-participating preference. It’s not as sexy, but it’s a lot safer.
2. Pro-rata rights are your best friend.
Pro-rata rights give you the right to maintain your ownership percentage in future funding rounds. This is huge. Without them, you’ll get diluted into oblivion. I’ve seen early investors with 10% of a company end up with less than 1% after a few rounds of funding. That’s a painful experience.
I always fight for pro-rata rights. It’s a non-negotiable for me. If a founder won’t give them to me, I walk. It’s that important.
3. The cap on a convertible note is more important than the discount.
Convertible notes are a popular way to invest in early-stage startups. They’re simple and they delay the valuation conversation. But don’t be fooled by the discount. The cap is what really matters.
I once invested in a company with a 20% discount and no cap. The company took off like a rocket. By the time they raised their Series A, the valuation was so high that my 20% discount was meaningless. I would have been much better off with a lower discount and a reasonable cap.
Now, I always push for a cap. It protects me from being diluted into dust if the company does exceptionally well.
4. Board seats are a double-edged sword.
Getting a board seat can be a great way to stay involved and help the company. But it’s also a lot of work. And if things go south, you can be held liable.
I’ve been on boards where I’ve had to fire the CEO, deal with lawsuits, and navigate a bankruptcy. It’s not glamorous. It’s stressful and time-consuming.
These days, I’m very selective about the board seats I take. I only join the board if I’m truly passionate about the company and I think I can make a real difference. Otherwise, I’m happy to be a board observer.
5. “Standard” is a myth.
Lawyers love to say that a particular term is “standard.” Don’t believe them. Everything is negotiable. I’ve seen it all. I’ve seen founders get terms that were supposedly impossible. I’ve seen investors get terms that were unheard of.
The key is to know what you want and to be able to justify it. If you can do that, you can get almost anything you want.
6. The no-shop clause is a powerful weapon.
The no-shop clause prevents the founder from shopping your term sheet around to other investors. This is a huge advantage. It gives you time to do your due diligence and to close the deal without having to worry about a bidding war.
I always insist on a no-shop clause. It’s a sign that the founder is serious about working with me.
7. The drag-along clause can save your ass.
The drag-along clause allows the majority of shareholders to force the minority shareholders to sell their shares. This is a critical provision. Without it, a small group of minority shareholders can block a sale of the company.
I’ve seen this happen. A company had a great offer to be acquired, but a few small investors held out for a higher price. The deal fell through and the company eventually went out of business. Everyone lost.
I always make sure there’s a drag-along clause in the term sheet. It’s a simple way to avoid a lot of heartache.
8. The redemption clause is a ticking time bomb.
The redemption clause gives investors the right to sell their shares back to the company after a certain period of time. This is a dangerous provision. It can put a lot of financial pressure on the company and it can create a conflict of interest between the investors and the founders.
I’ve seen companies that were forced to sell at a low price because they couldn’t afford to redeem their investors’ shares. It’s a terrible situation to be in.
I never ask for a redemption clause. I’m in it for the long haul. I want to build a great company, not to get my money back in five years.
9. The information rights are your eyes and ears.
The information rights give you the right to receive regular updates from the company. This is essential. You need to know what’s going on, both good and bad.
I always ask for monthly updates and for access to the company’s financial statements. It’s the only way to stay informed and to be able to help when things go wrong.
10. The right of first refusal is a double-edged sword.
The right of first refusal gives you the right to buy the founder’s shares if they decide to sell. This can be a good way to increase your ownership in the company. But it can also be a pain in the ass.
I’ve had to deal with founders who wanted to sell their shares to their brother-in-law for a ridiculously low price. It’s a hassle to have to deal with that.
I’m not a big fan of the right of first refusal. I’d rather have a clean and simple agreement.
11. The secondary market is your friend.
The secondary market is a place where you can sell your shares in a private company. This is a relatively new development, but it’s a game-changer. It gives you liquidity. You don’t have to wait for the company to be acquired or to go public to get your money out.
I’ve sold some of my shares in the secondary market. It’s a great way to de-risk my portfolio and to take some profits off the table.
12. The legal fees can be a killer.
Lawyers are expensive. And they can drag out the negotiation process for weeks. I’ve seen deals fall apart because the legal fees got out of control.
I always try to agree on a fixed fee for the legal work. It’s a simple way to keep the costs under control.
13. The relationship is more important than the terms.
At the end of the day, a term sheet is just a piece of paper. The most important thing is the relationship between the founder and the investor. If you have a good relationship, you can work through any problems that come up. If you have a bad relationship, even the best term sheet in the world won’t save you.
I’ve invested in companies with terrible term sheets because I believed in the founder. And I’ve passed on companies with great term sheets because I didn’t trust the founder.
Your gut is a powerful tool. Use it.
14. Don’t be a dick.
This is the most important lesson of all. Don’t be a dick. Don’t try to squeeze every last drop of blood out of the founder. Don’t be a bully. Don’t be a know-it-all.
Remember, you’re in this together. You’re partners. You’re on the same team. If you treat the founder with respect, they’ll treat you with respect. And that’s the foundation of a successful partnership.
I’ve been doing this for 18 years. I’ve made a lot of mistakes. But I’ve also learned a lot. And these are the 14 most important lessons I’ve learned. I hope they help you on your journey as an angel investor.
Frequently Asked Questions
Which item on this list has the highest impact?
It depends on your stage and context, but in my experience, the items near the top of the list tend to have the broadest applicability. That said, sometimes the less obvious items create the biggest breakthroughs for specific situations.
How were these items selected?
Each item on this list comes from direct experience, either from building my own companies or from patterns I've observed across the 200+ startups I've invested in. I prioritize practical, actionable items over theoretical concepts.
Can I implement all of these at once?
I'd strongly recommend against it. Pick the 2-3 items that resonate most with your current situation and focus there. Trying to do everything simultaneously is a recipe for doing nothing well.
Are these recommendations still relevant in 2026?
Absolutely. While specific tools and tactics change, the underlying principles remain consistent. I update my thinking regularly based on what I'm seeing in the market and across my portfolio companies.