Term sheet clause 4 of 25 · Economics
Participation in a term sheet
In plain English: Participating preferred takes its preference AND a share of what's left. Non-participating chooses the better of the two. Typical: Non-participating.
Founder-friendly
Non-participating.
Investor-friendly
Participating, or capped participation (e.g. 3x).
What to watch for
Red flag
Full participation with no cap.
How to model it
Don't judge this clause by reading it; put numbers on it. In our workbooks it's modelled in Exit Waterfall, so you can see what it changes in your ownership or your payout before you agree.
Negotiating it: liquidation preference and participation
Principle: Small words, big money.
- Aim for 1x non-participating; it's the common standard.
- Show the cost of participation with the Exit Waterfall at realistic exits.
- If you must concede, cap participation (e.g. at 3x).
Term sheet says 'participating preferred'
"We've modelled this at realistic exits and it shifts a lot of value from the team. Could we move to 1x non-participating, which we understand is standard for rounds like this?"
One of the scripts from the Negotiation Playbook. The playbook has more for each topic, plus what to give and what to hold.
Not legal advice. Norms vary by country and market cycle. Have a startup lawyer review your term sheet before you sign.