Term sheet explained: the clauses that matter at seed

The email says: we’d like to invest. A two-page PDF is attached. The first line has the number you’ve been dreaming of, and you read it three times. The remaining lines get ten minutes. Why linger? In your head, the money is spent already.

So what is that PDF? A term sheet. The headline number? The least interesting thing on it. Here is the term sheet explained for a seed round, clause by clause. For each one you get what it means in plain words, what counts as market-standard and what to push back on. Then we look at how the same ideas land in an Italian SRL, where the paper looks different. New to funding? Start from our beginner’s map from zero to a first round.

What is a term sheet, and is it binding?

It’s the menu, not the meal. An investor puts a price and a few conditions on paper, you argue for a week or two, and only then do the lawyers start on the contracts that count. So most of the sheet is intent. Carta points to three parts that bind both sides from day one: confidentiality, exclusivity and a promise to negotiate in good faith. Exclusivity is the clause with teeth. For a set window you agree not to solicit or negotiate competing offers, and if the deal dies in week four you’re back at square one with a month gone.

Two reference documents are worth reading before you open your own. In Italy, Growth Capital and Portolano Cavallo, with Italian Tech Alliance members, published a Series A term sheet with a glossary that covers the main negotiation points and market practice. Y Combinator drafted its own Series A term sheet and says it reflects the terms it sees most often from good VCs. Both are for Series A rather than seed, but the clauses are the ones you’ll meet earlier (if the stages are new to you, our guide to how startup funding stages work comes first).

The clauses that matter, one by one

Eleven clauses deserve a second read. The table gives each in plain words, with the founder-friendly position and the trap. Raising on a SAFE first? Then most of this arrives later, with the priced round: our guide to SAFE vs convertible note covers the earlier step, and the one on pre-revenue startup valuation covers how the number itself is set.

Clause	What it means	Founder-friendly	Watch out
Valuation (pre-money and post-money)	The company’s price before the new money (pre) and after it (post). Post-money is pre-money plus the investment.	A pre-money you can defend, and a round size that keeps the share you sell near the market norm	A big headline number paid for with a big option pool
Option pool	Shares set aside for future hires and advisers	A pool sized to your real hiring plan, with options already promised counted toward it	A large pool created before the money arrives, so only existing holders pay for it
Liquidation preference	Who is paid first, and how much, when the company is sold	1x, non-participating	More than 1x, or participating: the investor takes its money back and then shares in the rest
Anti-dilution	Adjusts the investor’s price if a later round is cheaper	Broad-based weighted average	Full ratchet
Board	Who sits on the board and votes on the big decisions	Founders keep the majority of seats, as in YC’s two-founders-to-one-investor template	A 2-2-1 board of two founders, two investors and an independent: founders lose control
Protective provisions (vetoes)	Decisions the investor can block even as a minority holder	A short list: selling the company, issuing new shares, taking on debt (Carta’s examples)	Vetoes over budgets, hiring or other day-to-day choices
Pro rata right	The right to invest in later rounds to keep the same percentage	Limited to the lead and the larger investors, with a deadline to exercise	Pro rata rights handed to every small investor, which complicates later rounds
Drag-along and tag-along	Drag-along: a majority can force all holders to join a sale. Tag-along: minority holders can join a sale on the same terms	A drag-along that needs the founders’ consent, or a minimum price	A drag-along that investors alone can trigger at any price
Founder vesting	Founders earn their shares over time. If one leaves early, the company can buy back the unvested part	Four years with a one-year cliff, counting the time already worked	The clock restarting from zero for founders who have built the company for two years
Exclusivity (no-shop)	A window in which you can’t talk to other investors. It is binding	Short, fixed, ending on a stated date	A long window, or extensions that depend on the investor
Information rights	The reports you owe the investor: accounts, budget, updates	Simple, regular reporting you already produce	Heavy reporting, or the same rights for every small holder

How do these clauses work in an Italian SRL?

Everything above comes from the US, where startups are corporations with shares and preferred stock. An Italian SRL has quotas, and quotas can’t be represented by shares (art. 2468 of the Civil Code), so lawyers translate the investor’s rights into two documents. You’ll probably sign both.

The statuto is the company’s constitution, and a clause in it binds every partner and the company. Article 2468 lets it give individual partners “particular rights” over the administration of the company or the distribution of profits, which is where a board seat, a veto or a preferred payout can sit. Once written there, those rights can be changed only with the consent of all partners.

The shareholders’ agreement (patto parasociale) is a private contract among partners. Unlike the statuto, it binds only whoever signs it, and not the company. The traditional time limit is five years (art. 2341-bis, written for SpA). One legal commentary adds that a drag-along clause works in an SRL statuto too, but the partner being dragged should receive at least what they would get on withdrawal (art. 2473).

Founder vesting needs its own translation. Occhiuto Legal describes the usual answer as reverse vesting: the quotas are registered in the founder’s name from day one, but the company or the other partners can repurchase the unvested part if the founder leaves early. Typical is four years with a one-year cliff, then monthly. As for the repurchase price (nominal value, fair market value or a formula), write it down, or it will turn into an argument later. And the statuto, the shareholders’ agreement and the cap table must say the same thing.

Liquidation preference, option pool and board: where money and control move

Start with liquidation preference, because it decides who gets what when the company is sold. A 1x non-participating preference lets the investor take its money back or its share of the sale, whichever is bigger. Participating means money back first and then a share of what’s left, which YC calls a double-dip. Carta found that only 3% of seed and Series A deals in 2025 had a preference above 1x, and its guide describes 1x non-participating as the standard. Our guide to liquidation preference walks through the sale scenarios.

The option pool is where the headline valuation and the real one drift apart. If the pool is created before the new money arrives and counted inside the pre-money valuation, only the existing holders pay for it. Our guide to the employee option pool works through the numbers.

On the board, count heads. YC’s template keeps the founders in control, two seats to one, and warns that control slips away with a 2-2-1 board of two founders, two investors and an independent. Carta describes a common early-stage setup as one seat for the lead investor, two for the founders and one for an independent both sides agree on. The independent is the swing vote, so who picks them matters as much as how many seats there are.

Anti-dilution: why full ratchet is the one to refuse

Anti-dilution only matters if a later round is priced below the one you’re signing. Then it adjusts the investor’s price retroactively. A full ratchet resets that price to the new, lower one, whatever the size of the round. A broad-based weighted average adjusts it according to how many new shares are issued and at what price, and it counts every share in the company, options included. Holloway’s guide calls the weighted average “absolutely customary” and the ratchet “very atypical”.

Here’s an invented example. A seed fund paid €1.00 a share for 2,000,000 preferred shares, in a company with 10,000,000 shares fully diluted. A year later the company raises €1 million at €0.50 a share.

Run the numbers. Under a full ratchet the fund’s price is simply reset to €0.50, so its 2,000,000 shares now convert into 4,000,000. The weighted average is gentler, though the formula looks like alphabet soup: new price = old price × (A + B) ÷ (A + C). A is the fully diluted shares before the round, 10,000,000. B is what the new money would have bought at the old price: €1 million at €1.00 is 1,000,000 shares. C is what was really issued: €1 million at €0.50 is 2,000,000. Plug them in and the fund’s price lands at about €0.917, so its shares convert into 2,181,818.

After the down round	Seed fund	Founders and pool	New investor
No anti-dilution	16.7%	66.7%	16.7%
Broad-based weighted average	17.9%	65.7%	16.4%
Full ratchet	28.6%	57.1%	14.3%

Same company, same cheap round. The founders keep 65.7% under a weighted average and 57.1% under a full ratchet, and the new investor is diluted too.

Your checklist before you sign

• Ask for the valuation in both forms, pre-money and post-money, plus the percentage the investor will own after the pool is created.
• Who pays for the option pool? Find the line and find out.
• Anything above 1x or participating in the liquidation clause: underline it.
• Anti-dilution should say broad-based weighted average. If you read “full ratchet”, stop and negotiate.
• Count the board seats, then ask who picks the independent.
• Every veto on the list gets one question: does it touch day-to-day management? If yes, push back.
• Write down the date exclusivity ends.
• Ask your lawyer where each clause will live: the statuto, the shareholders’ agreement, or both.

Once you sign, the investor starts checking you: our guide to startup due diligence shows what they’ll ask for. For the bigger picture of raising in Italy, our guide to raising capital for a startup in Italy is the hub.

This article is general information, not legal or tax advice. Company law and market practice change: have a lawyer or notary read any term sheet before you sign.