The Angel Investor Term Sheet Glossary: Liquidation Preference, Pro-Rata & Drag-Along

For professionals, corporate executives, and business owners entering angel investing, legal term sheets can seem dense with legal jargon. Understanding standard investor protective provisions ensures informed decision-making.

Key Term Sheet Clauses Explained

• **1. 1x Non-Participating Liquidation Preference:** Protects the investor's original principal in an exit or liquidation event before common stockholders receive distributions.
• **2. Pro-Rata (Pre-Emptive) Rights:** Guarantees the right to maintain your percentage ownership in subsequent funding rounds to prevent unwanted dilution.
• **3. Right of First Refusal (ROFR):** Gives existing shareholders the first opportunity to buy shares if a founder or major investor decides to sell.
• **4. Information Rights:** Contractual commitment ensuring investors receive formal monthly financial MIS statements and audited annual financial reports.
• **5. Drag-Along & Tag-Along Rights:** Tag-along protects minority angels by ensuring they can participate on equal terms if a majority stake is acquired by a strategic buyer.

FirstMartt utilizes clean, standardized, investor-friendly legal instruments that protect all shareholders equitably.