Sooner or later the SAFEs stop and someone prices the company. A lead investor sends a term sheet: two pages of numbers and defined terms, most of them boring, five of them worth real money. This is the priced round term sheet explained the way you'll actually use it: as arithmetic, not vocabulary.
If you can compute price per share from a pre-money valuation and a pool top-up, you can check every number in the deal yourself. That's the goal of this lesson. It builds on SAFEs and convertibles. Here we assume the convertibles are done and a real equity round is on the table.
What a priced round actually changes
A priced round is an equity financing: investors buy newly issued shares at a negotiated price per share, fixed at closing. Three things change at once.
- The company gets a real valuation. Not a cap, not a proxy, an actual price someone paid. Your outstanding SAFEs and notes convert at this round, at their caps or discounts.
- A new share class is born. Priced-round investors almost always buy preferred shares, which are common shares plus a contract: liquidation preference, anti-dilution, protective votes, information rights. The terms below define that contract.
- The paperwork gets heavy. Charter amendment, stock purchase agreement, investors' rights agreement, board consents. The term sheet is the non-binding summary everything else is drafted from, which is exactly why you negotiate at the term-sheet stage, not after.
Everything in a term sheet reduces to two questions: what fraction of the company does the money buy (valuation, pool, price per share), and who gets paid what when it ends (preference, participation, anti-dilution). Take them in order.
Pre-money, post-money, and price per share
The headline numbers relate by one identity:
Post-money = pre-money + new investment.
The investor's ownership is investment ÷ post-money. Raise $3M on a $12M pre-money and the post-money is $15M; the new money owns 3 ÷ 15 = 20%. So far, one division.
Price per share is where the real negotiation hides:
Price per share = pre-money valuation ÷ fully diluted pre-money shares.
Both halves of that fraction are negotiated. "Fully diluted" means the denominator counts not just issued shares but options, warrants, converting SAFEs, and, crucially, the new option pool the term sheet usually requires you to create before the money comes in. Every share added to the denominator lowers the price per share, which means the same dollars buy the investor more shares. The pre-money valuation can stay the same while the deal quietly gets worse.
The valuation is a headline; the denominator is the deal. Two term sheets can carry the same $12M pre-money and produce different prices per share, because each defines the fully diluted share count differently: pool in or out, warrants in or out, SAFEs on which basis. When you compare offers, compare price per share and your post-close ownership, never the headline number alone.
Worked example: $3M on $12M pre with a 10% pool
Here is the whole computation on a realistic Series Seed, start to finish.
Worked example: pricing the round
Two founders hold 3,500,000 shares each: 7,000,000 shares, 100% of the company. The term sheet: $3M at $12M pre-money, with an option pool equal to 10% of the post-money capitalization, created pre-money.
Step 1, ownership blocks. Post-money = 12 + 3 = $15M. Investor: 3 ÷ 15 = 20%. Pool: 10%. Founders keep what's left: 70%.
Step 2, total shares. The founders' 7,000,000 shares must equal 70% of the post-close total, so the total is 7,000,000 ÷ 0.70 = 10,000,000 shares.
Step 3, price per share. Fully diluted pre-money shares = 7,000,000 founders + 1,000,000 new pool = 8,000,000. PPS = 12,000,000 ÷ 8,000,000 = $1.50.
Step 4, new shares. Investor: 3,000,000 ÷ 1.50 = 2,000,000 shares. Pool: 1,000,000 shares reserved. Sanity check: 2,000,000 ÷ 10,000,000 = 20%. ✓
The before/after cap table:
| Holder | Before (shares) | Before (%) | After (shares) | After (%) |
|---|---|---|---|---|
| Founder A | 3,500,000 | 50.0% | 3,500,000 | 35.0% |
| Founder B | 3,500,000 | 50.0% | 3,500,000 | 35.0% |
| New option pool (reserved) | — | — | 1,000,000 | 10.0% |
| Series Seed investor | — | — | 2,000,000 | 20.0% |
| Total | 7,000,000 | 100% | 10,000,000 | 100% |
Notice what happened to the founders: they sold "20% of the company" but their ownership fell 30 points, from 100% to 70%. The extra 10 points is the pool, carved out of their side because it sits in the pre-money. Priced honestly, the 1,000,000 pool shares at $1.50 are worth $1.5M of pre-money value, so the effective pre-money the founders received is $10.5M, not $12M.
In a real close this computation runs alongside a stack of converting SAFEs, which makes it a simultaneous system rather than four tidy steps. The shares SAFEs convert into change the denominator that prices the round. That interlock is what Vquity's close-round wizard exists for: it converts the SAFE stack with a tested YC-style post-money engine, tops up the pool to the target, and snapshots the pre-close cap table in one atomic step, so you can model the round before you commit to it.
Liquidation preference and participation
Preferred shares come with a liquidation preference: on a sale or wind-down, the preferred holders get their money out before common sees anything. The standard today is 1× non-participating: the investor gets back 1× what they paid, or converts to common and takes their percentage, whichever is larger. It's downside protection, not double-dipping.
Participating preferred is the aggressive variant: the investor takes the 1× off the top and then also shares in the remainder as if converted. Sometimes a cap limits the total (e.g. 3× the investment); uncapped participation is the worst version for common holders.
Worked example: the same exit, two preference clauses
Our Series Seed investor paid $3M for 20%. Two years later the company sells for $12M.
1× non-participating: take the greater of the $3M preference or as-converted value (20% × 12M = $2.4M). The investor takes $3M; common splits the remaining $9M.
1× participating: $3M off the top, plus 20% of the remaining $9M = $1.8M. The investor takes $4.8M; common splits $7.2M. Same company, same exit, but participation moved $1.8M from the common holders to the investor.
At a big exit the gap closes for non-participating preferred: at $50M, converting to common (20% = $10M) beats the $3M preference, so the investor converts and everyone shares pro-rata. Participation, by contrast, is additive at every price.
Preferences stack across rounds (seniority, multiple classes, caps and carve-outs interacting), and that's a modeling problem of its own. The liquidation waterfalls lesson builds the full picture.
Anti-dilution: weighted average vs full ratchet
Anti-dilution protection answers one question: what happens to this investor's conversion price if you later sell shares cheaper than they paid, a down round? The mechanism is a repricing: the preferred's conversion ratio into common improves, so the same preferred shares convert into more common shares.
Two formulas, very different bite:
- Full ratchet: the old conversion price is reset all the way to the new round's price, no matter how small the new round is. Brutal, and rare in credible venture terms.
- Broad-based weighted average: the standard. The conversion price moves toward the new price, weighted by how much cheap stock was actually sold relative to the whole fully diluted capitalization. Small down round, small adjustment.
Worked example: a down round hits both clauses
Continuing the cap table above: 10,000,000 fully diluted shares, Series Seed conversion price $1.50. The company hits a rough patch and raises $2M at $1.00 per share (2,000,000 new shares).
Broad-based weighted average: new price = 1.50 × (A + B) ÷ (A + C), where A = 10,000,000 shares before the round, B = shares the $2M would have bought at $1.50 = 1,333,333, and C = 2,000,000 shares actually issued. That's 1.50 × 11,333,333 ÷ 12,000,000 = $1.4167. The investor's 2,000,000 preferred now convert into 2,000,000 × (1.50 ÷ 1.4167) ≈ 2,117,647 common, about 117,650 extra shares.
Full ratchet: conversion price resets to $1.00. The same preferred convert into 2,000,000 × 1.5 = 3,000,000 common, a full million extra shares, all of that dilution landing on the founders and employees.
Either way, the adjustment is borne by the holders who don't have the protection: common, i.e. founders and employees. When you see anti-dilution in a term sheet, the negotiation isn't whether (weighted average is standard everywhere); it's making sure the formula is broad-based and ratchets stay out.
Pool top-ups and pro-rata rights
Two more term-sheet lines move real money, both about the next stage of the company.
The pool top-up. As the worked example showed, a pool created in the pre-money is paid for by existing holders. This is the "option pool shuffle." The counter isn't to refuse a pool; you'll need one to hire. It's to negotiate the size with a real hiring plan: if 18 months of hires need 7%, don't accept 15% because it was the default in the draft. Every unneeded pool point is roughly a point of founder ownership given away at this round's price. The option pool shuffle post runs the negotiation in detail, and the option pools lesson covers sizing.
Pro-rata rights. A pro-rata right lets this round's investor invest in future rounds to maintain their percentage. It costs you nothing today; its price shows up later, when a hot Series A is oversubscribed and 20% of the allocation is spoken for before the new lead sits down. Standard for meaningful checks, and mostly fine. Just know that granting pro-rata to everyone, including tiny angel checks, crowds future rounds. Some term sheets also include super pro-rata (the right to increase ownership next round); that one deserves pushback.
The rest of a typical term sheet (board seats, protective provisions, information rights, drag-along, no-shop) governs control and process rather than payout math. It matters, but it doesn't change who gets how many shares, so it belongs to a different lesson.
You now have the round's mechanics: valuation to price per share to a before/after cap table, plus the terms that reshape the payout. Next we generalize the part founders feel most, dilution math: how ownership erodes round after round, and how to compute where you'll stand three financings from now.