Founder’s Guide: Series A

The term sheet, term by term

Here’s what each of those terms means for you, and where founders have room to negotiate. For full mechanics, each section links to our FAQ on that term.

Valuation, price per share and the option pool

The term sheet states a pre-money valuation, and the price per share is that valuation divided by the company’s fully diluted capitalization before the new money. At Westaway, fully diluted means issued and outstanding shares, plus the full option pool (granted and ungranted), plus warrants. SAFEs and notes aren’t part of your fully diluted count before the round, but they convert at the closing, so the term sheet will say the pre-money share count includes the shares they convert into.

The term sheet will also say the pre-money valuation “includes” an unallocated option pool equal to a set percentage of the post-money capitalization. That’s the option pool shuffle. Any increase needed to hit the target is created before the new money comes in, so the cost falls on the existing holders. A bigger pool means a lower effective valuation. Series A term sheets commonly target a post-money pool of around 10%, sometimes more for a company about to hire senior executives.

The way to win this negotiation is a hiring plan. Build a hire-by-hire option budget through the next round, typically 12 to 18 months: each role, when you’ll hire it and the grant size. Add a modest cushion and propose that total as the pool. Investors can test a plan. They can’t test a round number. Our default is a pool of 10%, 15% or 20% depending on how aggressively you’ll hire before the next round, not a market average. If the lead wants more than your plan supports, ask for the excess to come out of the post-money. And make sure unallocated shares you already have, and grants you’ve already promised, are counted. See Negotiating an Option Pool and Employee Option Pool.

Finally, weigh the price against the investor. The highest valuation isn’t always the best deal. A lead who will help you recruit, support the next round and stay steady through a bad quarter can be worth more than a few extra points of valuation from a fund that won’t.

How SAFEs and notes convert at the Series A

For many companies, the Series A is the first priced round, and it’s where a stack of SAFEs and notes finally turns into stock. You don’t need to do anything to trigger conversion. Under their terms, SAFEs and notes convert automatically at the closing, usually into a “shadow” series of the same preferred (Series A-1, A-2 and so on) that carries the same rights but a liquidation preference and conversion price based on the lower price each investor effectively paid.

Two features of the post-money SAFE matter at the Series A. First, each SAFE’s ownership was fixed at signing: purchase amount divided by the post-money cap, measured against the company’s capitalization just before the round, including the other converting SAFEs and the existing pool. Second, that capitalization leaves out any pool increase made in the Series A itself. So the converting SAFE holders share the cost of the pool top-up with the founders, and the new investors don’t share it at all when it sits in the pre-money. See SAFE, Valuation Cap and Convertible Notes.

Here’s a worked example. Before the round, the founders and employees hold 8,000,000 shares, and the option pool has 1,000,000 shares (500,000 granted, 500,000 unallocated), so the company has 9,000,000 shares fully diluted. The company raised two post-money SAFEs: $1,500,000 at a $15,000,000 cap and $3,000,000 at a $30,000,000 cap, each 10%. The lead now invests $20,000,000 at an $80,000,000 pre-money valuation and requires a 10% unallocated pool after closing.

The SAFEs together own 20% of the pre-round capitalization, so they convert into 2,250,000 shares (1,125,000 each) out of 11,250,000. To reach a 10% pool, the company adds about 1,035,714 shares in the pre-money. That makes about 12,285,714 shares pre-money, a Series A price of about $6.51 per share, and about 3,071,429 new shares for the lead.

The SAFE holders converted at about $1.33 and $2.67 per share, well below the $6.51 Series A price, which is their reward for investing early. Notice what the pool did. About $6.7 million of the $80 million pre-money is new pool, so the shares that existed before the round are really being valued at about $73.3 million. If the hiring plan had supported a 7% pool instead, the company would add only about 530,822 shares, the price would rise to about $6.79, and the founders and employees would hold about 54.3% instead of 52.1%. Two points of the company for the founders, from one number in the term sheet.

A few conversion problems come up often. Most-favored-nation clauses in early SAFEs may entitle those holders to the better terms of later SAFEs. A SAFE with both a cap and a discount converts at whichever gives more shares. Pro rata side letters let SAFE holders buy into the Series A, which can crowd the lead’s allocation. And notes accrue interest that converts too. Find these in your modeling, not at the closing. See SAFE vs Convertible Note vs Priced Round and Equity Dilution.

Liquidation preference

The liquidation preference decides who gets paid first in a sale or wind-down. The market standard at Series A, in the large majority of deals, is a 1x non-participating preference: the investor takes back what it invested or converts to common and takes its percentage, whichever is greater. In a good outcome, a 1x non-participating investor just takes its ownership share like everyone else. Participation, capped participation and multiples above 1x come out of the common stockholders’ share and should come with a compelling reason, often a lower valuation instead.

Seniority is the Series A-specific question. If you raised a priced seed, the new lead may ask for the Series A to be paid ahead of the Series Seed. Pari passu treatment (all preferred shares paid in proportion to their preferences) is common and is the cleaner answer. Seniority is mostly a fight between investor groups, but it changes what’s left for common in a modest sale.

Remember that Series A terms set the floor for every later round. If the Series A gets participation or seniority, the Series B lead will almost certainly ask for the same, and the preferences stack on top of each other. Before you agree to anything beyond a 1x non-participating preference, model the waterfall at several realistic sale prices with two or three future rounds layered on top. The cost usually shows up in the middle of the range, in the sales that are good but not great. See Liquidation Preference and Preferred Stock vs Common Stock.

Dividends and redemption

NVCA term sheets usually give the preferred non-cumulative dividends, paid only if the board declares them, and on par with any dividend paid on common. That’s standard and harmless for a startup that won’t pay dividends. Push back on cumulative (or “accruing”) dividends. They usually aren’t paid in cash each year. They build up quietly and are added to the investor’s liquidation preference, paid ahead of the common in a sale. A simple 8% accruing dividend that runs for five years turns a 1x preference into about 1.4x. They’re uncommon at Series A, and you should ask to strike them.

Redemption rights let investors force the company to buy back their shares after a set number of years. They’re uncommon at Series A, hard for a startup to honor, and worth declining. If a lead insists, keep the period long and the trigger narrow.

Anti-dilution

Anti-dilution protection lowers the price at which the preferred converts into common if the company later sells stock at a lower price per share. The market standard is broad-based weighted average, which gives a partial price adjustment scaled to how much stock is sold at the lower price. The formula multiplies the old conversion price by (A + B) ÷ (A + C), where A is the shares outstanding before the new issuance on a broad, fully diluted basis, B is the number of shares the new money would have bought at the old price, and C is the number of shares actually issued. Say the Series A converts at $1.00, the company has 10,000,000 shares outstanding on that basis, and it later sells 1,000,000 shares at $0.50. B is 500,000, so the new conversion price is $1.00 × 10,500,000 ÷ 11,000,000, or about $0.95. Full ratchet resets the conversion price all the way down to the new price, $0.50 in this example, no matter how small the down round, and is worth refusing.

At Series A, the work is in the carve-outs. Make sure option grants under the plan, conversions of SAFEs and notes, stock splits, and board-approved strategic issuances are excluded, and that a majority of the preferred can waive an adjustment for everyone. That waiver is how most down rounds actually get done. See Anti-dilution and What Is a Down Round?

Conversion and pay-to-play

Preferred holders can convert to common at any time, initially one for one. The charter also forces conversion in two cases: a qualified IPO meeting the size and listing thresholds in the charter, and a vote of the Requisite Holders (the preferred majority defined in the documents). Keep the IPO thresholds realistic so a small group of investors can’t block a good public offering, and check whose vote counts as the Requisite Holders.

Pay-to-play provisions penalize investors who don’t buy their share of a later round, usually by converting their preferred to common. The NVCA charter includes a sample. They’re rare in a healthy Series A and come up mostly in down rounds.

Voting rights and protective provisions: what can Series A investors veto?

Start with ordinary voting. The Series A Preferred votes together with the common on an as-converted basis, so a lead owning 20% has 20% of the stockholder vote. The preferred also votes separately to elect its own director or directors. NVCA charters usually add a clause letting the company increase its authorized common stock with the approval of a majority of all stockholders voting together, without a separate class vote of the common.

Protective provisions are the list of actions that need a separate vote of the preferred, no matter what the board or the common want. A Series A lead owning 20% can’t block anything on an ordinary stockholder vote, so the charter gives the preferred a class vote on fundamental matters: selling or dissolving the company, changing the preferred’s rights, creating senior or equal stock, changing authorized shares, paying dividends or redeeming shares, taking on debt above a threshold, and changing the board size.

The NVCA list is longer than the Series Seed list, and leads sometimes add operating items. Keep budgets, hiring and ordinary contracts at the board level, where the investor director votes and the company can move quickly. Ask for one combined vote of a majority of all preferred, not series-by-series vetoes. Know whether one fund holds enough of the preferred to block alone, set the debt threshold high enough to cover a working capital line and equipment financing, and ask for the provisions to fall away if the preferred shrinks below a set number of shares.

Don’t try to strike the protective provisions altogether. Every Series A lead will want them, and asking signals you don’t know the market. Read instead for the vetoes that are bigger than they look. A veto over creating any new series of stock, or over any amendment to the charter, is really a veto over your next financing, because every priced round creates a new series and amends the charter. Ask that the charter-amendment veto apply only to changes that adversely affect the Series A, and ideally only to changes that affect it differently from the other preferred. Push back on a veto over issuing stock that ranks equally with the Series A, since a future lead will usually want exactly that. And consider asking for a sale-price floor: a sale of the company above an agreed value doesn’t need a separate preferred vote. See What Are Protective Provisions?

The board

Board seats are the real control term in a Series A. Control of a startup comes from who sits on the board, not from what percentage of the stock you own. The lead almost always takes a seat. The usual choice is between a three-person board (two common seats and one preferred seat) and a five-person board (two common, two preferred and one independent director both sides approve).

Read how the common seats are designated. The NVCA voting agreement often makes one common seat a “CEO director” seat. That seat follows the title, so if a founder stops being CEO, the seat goes to the new CEO, and the board that replaced the founder fills it. Ask whether the founders’ seats are designated by the holders of common stock or tied to specific people, and what happens if a founder leaves. If you agree to an independent seat, set out how that person is chosen. Think about the Series B too. The next lead will want a seat, and seats are much easier to add than to take back.

At closing, the investor director will usually get an indemnification agreement, and the company should buy directors and officers (D&O) insurance if it hasn’t already. Observer rights for other investors are created by side letter, not by the bylaws, and should be subject to confidentiality and exclusion for privilege and conflicts. See How Do I Build an Early-Stage Startup Board? and What Does My Startup’s Board Need to Approve?

Information rights, pro rata and the Major Investor threshold

The investors’ rights agreement gives Major Investors information rights (annual and quarterly financials and an annual budget) and a right of first offer, usually called pro rata, to buy their share of future rounds. The Major Investor threshold decides how many holders you owe those reports and offers, so it’s worth negotiating. At Series A it’s often $500,000 to $1,000,000 invested. Set it so that only a handful of investors qualify, and decline “super pro rata” rights to buy more than a proportional share. Funds with pension-plan investors will also ask for a management rights letter, a short, standard side letter that gives the fund access to management. Many funds need one to keep their fund structured the way federal pension-plan rules require. For an institutional lead on the NVCA form, sign it once your counsel has reviewed it. If an angel or a non-fund investor asks for one, ask why, because they usually don’t need it. If an investor is outside the US or has non-US owners, talk to counsel before granting management or information rights, since those rights can raise national security review (CFIUS) questions. And keep a running list of every management rights letter and side letter you sign, round after round, so you know what you owe to whom. See Pro Rata Rights and How Do I Update Investors in My Startup?

ROFR and co-sale

The right of first refusal and co-sale agreement gives the company, and then the Major Investors, the right to buy shares a key holder wants to sell, on the same terms. Holders who don’t buy can instead sell alongside the seller (co-sale). At Series A, the agreement usually binds the founders and other significant common holders, and often the investors too. It doesn’t apply to a sale of the whole company. The standard terms are rarely worth fighting. Negotiate the exemptions for estate planning and affiliates, keep the company first in line, and keep the deadlines short. See Right of First Refusal.

Drag-along

A drag-along lets the stockholders who approve a sale of the company require everyone else to vote for it and sell on the same terms. It’s usual from the Series A on, and it binds almost everyone on your cap table, including converted SAFE holders, so the trigger you agree to now will matter for years.

The question is who can pull the trigger. In the current NVCA voting agreement, it’s the holders of a set percentage of the preferred, optionally together with a majority of the common held by key holders, and optionally the board. Our recommended trigger is the board, a majority of the preferred and a majority of the common (often limited to common held by founders and current employees). The NVCA forms note that putting the board in the trigger can create fiduciary duty risk for the directors who approve a sale. That doesn’t change the main point for founders: a drag-along that needs only the preferred lets one lead with most of the preferred force a sale. Make sure the common vote is in the trigger.

Dragged stockholders should get the same price per share within their class, give representations only about their own shares, and have liability that is several, pro rata and capped at the proceeds they receive. They shouldn’t be required to sign a non-compete. Expect the agreement to include a waiver of appraisal rights. See Drag-Along Rights.

Registration rights

Registration rights let investors require the company to register their shares with the SEC, either on demand after an IPO or by joining a registration the company files (“piggyback” rights). They almost never matter until an IPO, and the NVCA terms are standard. One point founders sometimes get wrong: if underwriters cut back the number of shares sold in an offering, the investors’ registrable shares generally have priority over founder and other holder shares. Investors also agree to a lock-up, usually 180 days after an IPO, and founders and other major holders sign one too.

Founder matters: vesting, acceleration, non-competes and secondaries

Expect the lead to look at founder vesting. If your founder shares are already vesting on a four-year schedule with a one-year cliff, that usually ends the discussion. If they’re fully vested, or close to it, a lead may ask founders to put some shares back under vesting. Ask for credit for the time you’ve already put in. Read the details closely: the vesting commencement date (it should be when you started, not the closing), whether vesting accelerates if the company terminates you without cause, and what happens to unvested shares if you leave. Under a standard founder stock purchase agreement, the company can buy back unvested shares at the price you paid, typically $0.00001 per share for founder stock. Some leads also ask about acceleration. Double-trigger acceleration, which accelerates vesting only if the company is sold and the founder is then terminated, is common and reasonable for founders. See Vesting Schedule and Single Trigger vs Double Trigger Acceleration.

Older term sheets asked every founder and key employee to sign a non-compete. We don’t recommend non-competes for employees, and in a growing list of states they’re void: California, Minnesota, North Dakota and Oklahoma ban them, and Washington’s ban takes effect in 2027. The federal FTC rule never took effect. A confidentiality and invention assignment agreement, signed by every founder, employee and contractor, plus a narrow non-solicit protect the company without the enforceability problem. A reasonable non-solicit usually runs 12 months and covers only the customers and employees the person actually dealt with. California voids most non-solicits, and other states have their own rules, so check each state where you have people. See Non-Compete Clauses and Non-Solicitation Clauses.

Some Series A rounds let founders sell a small amount of common stock, usually to the lead. A modest founder secondary can make sense after years at a low salary. It needs board approval, waivers under the ROFR and co-sale agreement, and attention to how the price compares to your 409A valuation. Talk to your tax advisor before agreeing to one.

No-shop, confidentiality and legal fees

A Series A term sheet is mostly a handshake on paper. Neither side is bound to close, so the lead can still walk away after diligence, and you can still decline the deal. The exceptions are the no-shop and confidentiality clauses (along with boilerplate such as governing law), which bind you the day you sign. Read those two clauses as carefully as any contract, because during the no-shop window you can’t talk to other investors even if the lead goes quiet.

The no-shop bars the company from soliciting other investors for a set period while the lead completes diligence, commonly 30 to 60 days. Keep it short, and make sure it ends if the lead walks away. The confidentiality term bars sharing the term sheet beyond your team, board, advisors and existing investors.

The term sheet will also usually ask the company to pay the lead’s legal fees. Every party should pay its own lawyers, and we think this term should be struck. If the lead insists, cap it at a fixed amount, roughly $25,000 to $50,000 at Series A, covering all investor counsel fees and expenses. Your own legal cost for a Series A on NVCA documents is commonly about $40,000 to $100,000 or more, depending mostly on how clean your records are. See Who Pays the Legal Fees in a Startup Funding Round?