What is a liquidation preference in a VC term sheet?

A liquidation preference gives preferred shareholders the right to receive their investment back (plus any multiple) before common shareholders (founders, employees) receive anything in an exit. A 1x non-participating preferred means VCs get their money back first, then the remaining proceeds go to all shareholders pro-rata. A 2x participating preferred means VCs get 2× their investment back, then participate alongside common in remaining proceeds — double-dipping that significantly disadvantages founders in moderate exits.

What is broad-based weighted average anti-dilution?

Broad-based weighted average anti-dilution adjusts the conversion price of preferred shares downward (increasing the number of common shares they convert into) if the company raises a down round. The adjustment formula includes all outstanding shares (options, warrants, convertible notes) in the calculation, which makes the adjustment less severe for founders than narrow-based. Broad-based is the most common and founder-friendly form. Full ratchet (most investor-favorable) adjusts the conversion price to the new lower price — maximally dilutive to founders.

How does AI help with VC term sheet analysis?

Claude with ClaudeFinLab models the economic impact of term sheet provisions: liquidation preference waterfalls at multiple exit prices, anti-dilution adjustments in down rounds, option pool expansion effects, pro-rata right dilution, and founder net proceeds at various exit scenarios. These calculations are complex and interdependent — Claude handles the math while founders focus on the negotiation.

AI for VC Term Sheet Analysis: Liquidation Preferences, Anti-Dilution, and Cap Table with Claude (2026)

How founders and investors use Claude AI to model VC term sheet economics: liquidation preference waterfalls at multiple exit prices, participating vs non-participating comparison, option pool shuffle dilution, anti-dilution provisions in down rounds, and pro-rata rights analysis.

VC Term Sheet Analysis and AI

A VC term sheet looks like a 5-page document with benign-sounding legal terms. In reality, the economic provisions — liquidation preferences, anti-dilution, option pool sizing, pay-to-play — determine how much founders and employees receive in various exit scenarios. Claude with ClaudeFinLab models the economics, shows the founder proceeds at $50M, $100M, and $200M exits, and identifies the provisions that most affect outcomes.

Liquidation Preference Waterfall

"Model the liquidation preference waterfall for this term sheet: Series A investment $8M at $32M pre-money ($40M post-money valuation). Series A liquidation preference: 1x non-participating. Fully-diluted cap table at close: Founders 60%, Employee option pool 15%, Series A 25%. Scenario analysis at 3 exit prices: (1) $25M exit: Series A gets $8M (preference) = 100% of proceeds. Founders get $0 (exit < liquidation preference). (2) $50M exit: Series A preference $8M, remaining $42M splits pro-rata: A gets $8M + $10.5M (25%) = $18.5M; Founders get $25.2M (60%). (3) $120M exit: A converts to common (conversion is better than preference — converts when exit/ownership > preference). A gets $30M (25%); Founders $72M (60%)."
"Compare participating vs non-participating preferred: same deal ($8M, $40M post). In participating preferred, Series A gets preference first ($8M) THEN participates in remaining proceeds as if converted. At $50M exit: participating: A gets $8M + 25% × ($50M - $8M) = $8M + $10.5M = $18.5M. Non-participating: A gets max(preference $8M, conversion $12.5M) = converts, gets $12.5M. At $50M: non-participating pays founders $5M more ($37.5M vs $32.5M for founders). At $100M: participating A gets $8M + $23M = $31M; non-participating A gets $25M. The difference widens at higher exits."

Option Pool Shuffle

"Model the option pool shuffle: investor requires 20% option pool post-closing. Current cap table: Founders 100% (pre-money, 10M shares). $8M investment at $40M post-money = investor gets 2M shares (20%). To create 20% option pool from the 40M post-money valuation: pool = 20% × total post-money shares. Total shares needed: 10M + investor + pool. If pool is created pre-money (standard): investor's 20% is 20% of (founders + pool + investor). Pool dilutes founders entirely: founders end up with 60% × (1 - pool effect). Calculate actual founder ownership if 20% pool is created pre-money vs post-money."

Anti-Dilution in a Down Round

"Model Series A broad-based weighted average anti-dilution in a down round: Series A invested $8M at $4.00/share (2M shares). Series B is a down round at $2.50/share ($5M investment). Broad-based weighted average formula: new conversion price = old price × (old shares + investment / new price) / (old shares + investment / old price). Fully-diluted shares before Series B: 10M founders + 2M Series A + 2M pool = 14M. Anti-diluted conversion price: $4.00 × (14M + $5M/$2.50) / (14M + $5M/$4.00) = $4.00 × (14M + 2M) / (14M + 1.25M) = $4.00 × 16/15.25 = $4.20 — wait, that's higher, so anti-dilution formula: CP2 = CP1 × (A + B) / (A + C) where A = old shares, B = new shares if at old price, C = actual new shares. Compute correctly and explain the dilution to founders."

Pro-Rata and ROFR Analysis

"Analyze the economic impact of Series A pro-rata rights: investor has right to maintain pro-rata ownership (25%) in all future rounds. Series B raises $20M at $60M pre-money ($80M post). New shares: $20M / $3.00 per share (60M/20M shares = $3.00) = 6.67M new shares. Series A's pro-rata: 25% × 6.67M = 1.67M shares = $5M investment required. If Series A exercises pro-rata: their ownership stays at 25%. If they don't exercise: Series A dilutes to 17.5%. Pro-rata right is valuable — failing to exercise causes significant dilution. How does pro-rata right affect the founders' future raise strategy?"

Where to Start

Paste the key economic terms from the term sheet (pre-money valuation, investment amount, liquidation preference type and multiple, option pool size, anti-dilution provision) and ask Claude to build the exit waterfall at 3 price points: 1x, 2.5x, and 5x your post-money valuation. The difference between founder proceeds at each exit, across different liquidation preference structures, is the most important economic calculation in the term sheet negotiation.

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