Verified against Claude · 2026-08-07
Get a term sheet clause explained in plain English before you sign anything
Walks through what a term sheet or SAFE clause mechanically does to ownership and payout, with a concrete numeric example — mechanics only, explicitly not legal or investment advice.
The prompt
Ready to copy — highlighted parts are example details you can swap.
You are explaining fundraising term-sheet mechanics in plain English. You explain what a term literally computes or controls — ownership, control, and payout math. You do not give legal advice, and you never state or imply whether the founder should accept it. CONTEXT Instrument type: Priced seed round, Series Seed preferred stock Term or clause to explain: "1x non-participating liquidation preference" Current cap table summary, if you want a concrete example run through it: Founders hold 78% pre-round, raising $2,000,000 at a $9,000,000 pre-money valuation Specific question you actually have about it: Does this mean the investor gets paid before founders on any exit, even a small one? PLAIN-ENGLISH RESTATEMENT Restate "1x non-participating liquidation preference" in plain English — what it literally computes or controls mechanically (e.g. what a valuation cap does to the conversion price, what a 1x non-participating liquidation preference pays out on exit, what a pro-rata right lets the holder do in a future round). WORKED EXAMPLE Walk through one concrete numeric example. Use Founders hold 78% pre-round, raising $2,000,000 at a $9,000,000 pre-money valuation if given; otherwise invent a simple, clearly labeled illustrative example with round numbers, and state explicitly that it's illustrative, not this founder's actual numbers. MARKET CONTEXT State the typical/common range for this term in current early-stage market practice, explicitly labeled as general market color, not a benchmark or recommendation for this specific deal. DIRECT ANSWER TO THE STATED CONCERN If Does this mean the investor gets paid before founders on any exit, even a small one? names a specific question, answer that exact question mechanically — what the clause does or doesn't do about it — without drifting into whether it's a good or bad term for this founder to accept. MANDATORY CLOSING LINE End with this exact reminder, unmodified: "This explains mechanics only. It is not legal or investment advice — have a startup lawyer review any term sheet before you sign." OUTPUT FORMAT Five numbered sections in the order above. Never state or imply an opinion on whether this founder should accept the term.
Customize
Optional — swap in your own details for the highlighted parts above.
Why this works
The prompt enforces a specific separation that most AI-generated fundraising answers blur: 'what a clause computes' is arithmetic and can be stated as fact, while 'whether to accept it' is a judgment call that depends on negotiation leverage, legal context, and risk tolerance the model has no access to — collapsing those two into one answer is exactly where AI fundraising advice becomes genuinely risky rather than just unhelpful. Running a concrete numeric example matters because these terms are famously counterintuitive in the abstract: a 1x non-participating liquidation preference sounds like a minor technicality as a sentence, but running an actual exit number through it — what founders and common shareholders keep versus what the preferred holder takes first — is what makes a founder realize what it actually pays out before common stock sees a dollar, in a way the sentence alone doesn't convey. Answering the {{specific_concern}} directly and mechanically, rather than letting the response drift into general education about the clause, targets a real failure mode of AI explanations of legal-adjacent topics: a founder asks one precise question ('does this trigger on a small exit too?') and gets back a broad tutorial that technically contains the answer somewhere but never states it plainly, which is functionally the same as not answering at all when the founder is about to sign something. The hardcoded, unmodifiable lawyer-referral line closing every response is a fixed guardrail rather than a soft suggestion the model could be talked out of mid-conversation if a founder pushes for a stronger opinion on whether to sign.
What you get back
Plain English: A 1x non-participating liquidation preference means that on an exit, the preferred investor gets back at least their original investment before common shareholders receive anything — but they must choose either that preference or converting to common and sharing pro-rata, not both. Illustrative example (not this founder's real numbers): On a $2,000,000 investment with a 1x preference, if the company sells for $6,000,000, the investor takes $2,000,000 first, then the remaining $4,000,000 splits among common shareholders per their ownership — unless converting to common and taking their pro-rata share of the full $6,000,000 would pay them more, in which case they'd choose that instead. Typical market range: 1x non-participating is the most common liquidation preference structure at seed stage in current market practice — this is general market color, not a benchmark for this specific deal. Direct answer: Yes — this clause applies on any exit, including a small one; it is not limited to a specific deal size, and there is no floor below which it stops applying. This explains mechanics only. It is not legal or investment advice — have a startup lawyer review any term sheet before you sign.
Verified against
Claude Sonnet 5 · 2026-08-07
Changelog
- 2026-08-07 — Initial publish, verified against Claude Sonnet 5.
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