People think managing a venture fund is some kind of dark art. They picture a bunch of guys in Patagonia vests sitting in a conference room, throwing darts at a board of startups. It’s not. At least, not for us. Managing our $100M, highly-concentrated fund of just four companies is about one thing above all else: discipline.
And the heart of that discipline? The term sheet.
I know, I know. Term sheets are boring. They’re full of legal jargon that makes your eyes glaze over. But I’m telling you, a well-crafted term sheet is the single most important document in the founder-investor relationship. It’s the constitution for your partnership. It’s where the game is won or lost, long before a single dollar is wired. Forget the flashy launch parties and the TechCrunch articles. The real work is done in the trenches, with a fine-tooth comb and a bottle of Advil, poring over the details of a term sheet.
The Ghost in the Machine
I learned this the hard way. Early in my angel investing career, I did a handshake deal with a founder. We were aligned on vision, the product was brilliant, and I was excited. I wired the money without a proper term sheet. What a mistake. Six months later, we were at each other's throats over dilution in the next round. The company eventually failed, and while the market played a role, the real cancer was the breakdown in trust between us. We didn't have a shared rulebook. We were playing different games. It was a painful, expensive lesson in the importance of getting the legal stuff right.
It wasn't the only time I got burned. I remember another deal, a social media app that was supposed to be the next big thing. The founder was a charismatic guy, a real showman. He could sell ice to an Eskimo. And he sold me. I was so caught up in the hype that I didn't pay enough attention to the term sheet. I ended up with a bunch of preferred stock that had a nasty participating feature. When the company sold for a disappointing price, the VCs got their money back and then some, while I was left with pennies on the dollar. I felt like a fool. I had let my emotions get the best of me. I had fallen in love with the story, and I had forgotten that investing is a business.
Never again. Now, I live and die by the term sheet. It’s not about being ruthless or squeezing founders. It’s about clarity. It’s about making sure everyone is on the same page from day one. When I invested in Scale AI, Alex and I spent hours going through the term sheet line by line. It wasn’t an adversarial process. It was a constructive one. We were building the foundation for a multi-billion dollar company. We talked about everything, from the size of the option pool to the voting rights of the preferred stock. We wanted to make sure that there were no surprises down the road. And it paid off. We've had a great relationship, and the company has been a phenomenal success.
Our Term Sheet Philosophy: Simple, Clean, and Founder-Friendly
Our term sheets are designed to be simple. I’m not interested in playing games with complex structures or loaded terms. We use standard, founder-friendly documents from Clerky or Cooley GO as our starting point. We focus on a few key areas:
Valuation: We don’t try to win on valuation. We want to pay a fair price that sets the company up for success in the next round. We’d rather have a smaller piece of a huge pie than a huge piece of a tiny one. I've seen too many companies get crushed by a high valuation in their seed round. They can't raise their next round at a higher valuation, and they end up in a down round, which can be a death spiral. We want to see our companies succeed, and that means setting them up with a realistic valuation that they can grow into.
Liquidation Preference: We always use a 1x, non-participating liquidation preference. This means that in a sale, we get our money back first. But we don’t get to double-dip and take a piece of the remaining proceeds. It’s the cleanest and fairest structure for everyone. I've seen some investors try to get cute with liquidation preferences, with participating preferred and multiples. It's a red flag for me. It tells me that the investor is more interested in protecting their downside than in maximizing the upside for everyone. That's not the kind of partner I want to be.
Pro-Rata Rights: This is a big one for us. Pro-rata rights give us the option to maintain our ownership percentage in future funding rounds. For a concentrated fund like ours, this is essential. We’re making a big bet on a small number of companies, and we want to be able to continue to support them as they grow. We're not just passive investors. We're active partners. We're in it for the long haul. And our pro-rata rights ensure that we have a seat at the table as the company grows.
Board Seats: We typically take one board seat. We want to be active and helpful, but we don’t want to run the company. That’s the founder’s job. Our role is to be a trusted advisor and a strategic partner. We're there to provide guidance and support, to help the founder see around corners, and to make introductions to potential customers and partners. We're not there to micromanage. We're there to help the founder build a great company.
Employee Option Pool: We always make sure that the term sheet includes a provision for a healthy employee option pool. We want to see the company attract and retain top talent, and that means giving employees a piece of the pie. A good rule of thumb is to set aside 10-15% of the company's stock for the option pool. It's a powerful incentive for employees to work hard and to think like owners.
The System is the Solution
We don’t just sign the term sheet and throw it in a drawer. We use it as a living document. We have a custom-built dashboard that tracks all of our portfolio companies. Each company has a page that pulls in data directly from their accounting software and cap table management platform. We track key metrics, burn rate, and runway. And we have a section for each company that outlines the key terms from the term sheet.
This system allows us to have informed, productive conversations with our founders. We’re not just asking “how’s it going?” We’re asking “I see your burn rate is up 15% month-over-month. What’s driving that? And how does that impact your runway?” We can see the data in real-time, so we can spot problems early and work with the founder to get them back on track. For example, we had one company that was burning through cash way too fast. We were able to see it in the dashboard, and we had a conversation with the founder. It turned out that they had hired a bunch of expensive engineers, but they weren't shipping product any faster. We helped them to right-size the team and to focus on the things that really mattered. And it made all the difference. The company is now thriving.
It’s not about micromanaging. It’s about being a good partner. It’s about helping our founders see around corners and make better decisions. And it all starts with the term sheet.
Red Flags to Look For in a Term Sheet
I've seen a lot of term sheets in my day, and I've learned to spot the red flags from a mile away. Here are a few things that make me run for the hills:
Exploding Term Sheets: This is a classic pressure tactic. The investor gives you a term sheet with a very short expiration date, like 24 or 48 hours. They're trying to force you to make a quick decision without giving you time to think or to shop the deal around. It's a sign of a desperate or an predatory investor. A good investor will give you a reasonable amount of time to consider their offer.
No-Shop Clauses: A no-shop clause prevents you from talking to other investors for a certain period of time after you sign the term sheet. It's a way for the investor to lock you up and to prevent you from getting a better offer. I'm not a fan of no-shop clauses. I think that founders should be able to talk to as many investors as they want. It's a free market, after all.
Full-Ratchet Anti-Dilution: This is a nasty little provision that can really screw you over. It says that if you issue new stock at a lower price than the investor paid, their conversion price will be adjusted down to the new price. This means that they get more stock for their money, and you get diluted into oblivion. It's a sign of an investor who is more interested in protecting their own ass than in helping you build a great company.
Super Pro-Rata Rights: I mentioned that we like to have pro-rata rights. But some investors take it to the next level with super pro-rata rights. This gives them the right to buy more than their pro-rata share in future rounds. It's a way for them to double down on their winners and to squeeze out other investors. It's a sign of a greedy investor who is not a team player.
It’s Not Just a Piece of Paper
So, the next time you see a term sheet, don’t just skim it. Read it. Understand it. And if you’re a founder, don’t be afraid to negotiate it. A good investor will welcome the conversation. They’ll know that you’re a serious entrepreneur who understands the importance of building a strong foundation for your company. Remember, you're not just taking their money. You're entering into a long-term partnership. And you want to make sure that you're getting a fair deal.
And if you’re an investor, don’t get cute with your term sheets. Keep them clean. Keep them simple. And remember that you’re not just investing in a company. You’re investing in a relationship. The term sheet is the foundation of that relationship. Make it a strong one. Because when the going gets tough, and it always does, you'll be glad you did.
Frequently Asked Questions
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.