📖 Business
Economics vs Control Terms
Every venture capital term sheet breaks down into two fundamental categories: **economic terms** (who gets what money in a financial event) and **control terms** (who decides what happens to the company). Economic terms include valuation, liquidation preferences, anti-dilution provisions, and the option pool. Control terms include board composition, protective provisions, drag-along rights, and voting thresholds. Most founders fixate on valuation — the headline number — and neglect control terms, which is exactly where experienced VCs protect their investment and exert long-term influence over the company's direction.
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How It Works
Economic terms — who gets the money:
- Pre-money valuation — what the company is worth before the investment. The number everyone talks about.
- Liquidation preferences — who gets paid first (and how much) in a sale or liquidation event.
- Anti-dilution provisions — protection for investors if the company raises a future round at a lower valuation (a "down round").
- Option pool — shares reserved for employee stock options. VCs typically want this created pre-money, diluting founders rather than themselves.
- Vesting schedules — how founders and employees earn their equity over time.
Control terms — who makes decisions:
- Board composition — who gets seats, and therefore who controls key votes (fundraising, acquisitions, executive hiring/firing).
- Protective provisions — veto rights that let investors block certain actions (selling the company, taking on debt, changing the charter).
- Drag-along rights — the ability for a majority to force all shareholders to agree to a sale.
- Information rights — what financial data the company must share with investors and when.
The asymmetry: A founder can "win" on valuation and still lose control of their company if they give away too many board seats and protective provisions. A high valuation with harsh control terms is often worse than a moderate valuation with founder-friendly governance.