Which Term Sheet Clauses Should an Angel Investing in Taiwan Actually Read?

Before you read: This is general educational information and a practitioner's orientation, not investment, legal, accounting, tax, or securities-law advice; it makes no promise of returns, fundraising success, or exit. The amounts, valuations, and clauses below are illustrative — meant to show how a clause allocates risk, not a universal standard or advice for any specific deal. For real investment documents and case-specific decisions, consult a qualified professional who knows startup transactions.

A term sheet (the document that sets out the main terms of a deal before the formal contract is signed) is not really about price. It is about who gets paid first, who carries the risk, and who can still participate in the next round when the company succeeds, stalls, raises down, or gets sold — valuation is only the most visible of those cells, and not always the most decisive.

Why clauses are not legal fine print but how risk gets divided

It is easy in early-stage investing to put all the focus on valuation. The founder wants it higher, the investor wants it reasonable, and at the table it looks like everyone is just negotiating one number. But once that number is fixed, what actually decides how much you get back is the string of clauses behind it: enter the same company through a SAFE, a convertible note, or a priced round, and how much you are diluted later, whether you can see the financials, and where you sit in the distribution waterfall when things go wrong can all be completely different. Winning the valuation while missing the clauses — only to discover at a middling exit that you barely recovered anything — is not rare in early-stage investing.

So the first mindset shift when reading a term sheet is to stop asking "is this valuation cheap?" and start asking "does this instrument and this set of clauses strike a reasonable balance among speed, protection, governance, and next-round headroom?" When you cannot follow a clause, you should not move forward on verbal trust in the founder alone — verbal trust does not reach the day the company turns down, but the documents do. An angel should at least get clear on six things: the valuation or valuation cap, the conversion mechanics, information rights, liquidation and preference, dilution and next-round headroom, and who is leading the round and who handles post-investment governance. Below, each is unpacked in turn, with one cell-by-cell worked example to make the most under-appreciated of them — liquidation preference — concrete.

SAFE or priced round: two instruments handling different risks

Early-stage deals commonly follow one of two paths, and the difference is not that one is more sophisticated, but which kind of risk each is good at handling. A SAFE (Simple Agreement for Future Equity — an early-stage instrument that exchanges cash now for future equity while deferring valuation to the next round) and similar convertible instruments suit a company that is still very early, where valuation is hard to pin down precisely, the amount is small, and money needs to arrive fast; the upside is low transaction cost and relatively simple documents, and the ability to push the hardest question — valuation — to a later round when there is more data.

But "simple" does not mean "no risk." Even with a SAFE, the investor still needs to confirm the valuation cap (the ceiling valuation used to convert into equity — the lower the cap, the more equity you typically convert into), the discount, the most-favored-nation terms, the conversion triggers, and one frequently overlooked question: what happens to this SAFE if the company never raises a next round. A priced round is the opposite — it suits a larger amount, a company with clearer revenue or user metrics, and situations needing an institutional lead, a board arrangement, information rights, or fuller governance; the upside is that rights and obligations are written out in one pass and the cap table (the table of who owns what equity) stays clean, at the cost of a longer process, higher legal fees, and more time spent negotiating control and protective clauses.

Two contrasting scenarios make it clear. An early B2B software company has a handful of paying customers but clear product progress, needs to top up the team and cloud costs within two months, is raising a modest amount, and lacks data to set a valuation — here a SAFE is usually more efficient than a priced round. Another company in semiconductor IP or medical devices already has licensing or pilot-production revenue, is preparing to raise a larger amount, and the new investor wants a board seat, information rights, and follow-on governance — forcing a simple SAFE here would only muddy future rights and obligations, and the slower priced round fits the need better. Neither scenario has a textbook answer; the question is always the same one: does this instrument strike a reasonable balance among speed, protection, governance, and next-round headroom (for the details and traps of SAFEs, see A SAFE Is Fast, but Not Always Simple: Valuation Cap, Discount, and Founder Dilution).

The economic and control clauses you must at least understand

Valuation and the valuation cap need one belief corrected first: a valuation is not better for being lower, nor does a higher one mean a stronger company. The valuation sets your entry cost, and it sets the bar the next round has to clear — a cap set too high may make the next round's investors unwilling to come in, forcing a down round; set too low, the founder takes unreasonable dilution, and their appetite and momentum to raise again suffer. So valuation should be read together with the stage, the risk, the next-round milestones, and future fundraising headroom, not compared in isolation as a bigger-or-smaller number.

Conversion and dilution are the cell to press hardest on with a SAFE or convertible note: exactly how, when, and on what terms it converts into equity. An angel should ask to see a simple cap-table simulation — at different next-round valuations, roughly how much equity you end up with, and what the founders and the option pool (the pool of shares reserved for future employees, usually diluted out of existing shareholders in this round) get diluted to. Without that simulation, "the valuation cap sounds fine" is often just an illusion.

Information rights are the angel's most practical, yet most frequently conceded, protection. An angel does not necessarily need to interfere in the company, but should at least know whether it is still on the right track — basic periodic investor updates, notice of material events, next-round information, and an annual financial summary are usually more useful than complex control rights, because a small-ticket investor rarely actually exercises a veto, yet almost always needs to know whether the company is alive and well. As for who is leading, who is following, and who handles post-investment coordination, settle the roles and the main point of contact before investing.

A number sense for liquidation preference: participating vs. non-participating

Most of the cells above come down to judgment; liquidation preference (the right of preferred-share holders to recover an agreed amount ahead of common shareholders when the company is sold or liquidated) can be computed for you directly — and its bite is sharpest at a middling, neither-here-nor-there exit price, which happens to be the exit range most early companies actually land in.

Take a de-identified, cell-by-cell example. A company raises NT$5 million; the investor takes 20% in preferred shares and the founders hold 80%, with a "1x liquidation preference" (at exit, the investor may recover 1x their capital first — NT$5 million). The table below compares "non-participating" and "participating" at two exit prices, and how much each side gets.

Exit price	Non-participating (investor takes the higher of the two)	Participating (capital back first, then share the rest pro rata)
NT$12M (middling exit)	Investor takes max(NT$5M capital, pro rata 20%×12M = NT$2.4M) = NT$5M; founders NT$7M	Investor NT$5M + 20% of the remaining NT$7M = NT$1.4M, total NT$6.4M; founders NT$5.6M
NT$60M (big success)	Investor waives the preference, converts to common, pro rata 20% = NT$12M; founders NT$48M	Investor NT$5M + 20% of the remaining NT$55M = NT$11M, total NT$16M; founders NT$44M

Two points should jump out of the table. First, with non-participating, when the company is a big success the investor will choose to waive the preference and just take pro rata, because 20% of NT$60M (NT$12M) already exceeds the NT$5M capital — the preference effectively "drops away" at a high exit, so its damage to common stock is limited. Participating, by contrast, takes from both ends: capital back first, and then a pro rata cut of the remainder too (some designs add a cap, "capped participating" — beyond a certain multiple it reverts to pure pro rata, so it is not entirely without a ceiling, but the basic form does eat from both ends). Second, the gap hurts common stock most at a middling exit — at the same NT$12M exit, participating lets the investor take an extra NT$1.4M (NT$5M → NT$6.4M), and that NT$1.4M comes entirely out of the founders' NT$7M. When you see "participating" or a "2x or higher" preference, recognize how much it eats out of the founders' hands in the very middling-exit scenario that is most likely to occur.

Anti-dilution clauses (anti-dilution — the mechanism that compensates an early investor's equity if a later round raises at a lower valuation) follow the same logic: the compensation computed under full ratchet (full ratchet — resets the early investor's conversion price straight to the new low, the most aggressive compensation) versus broad-based weighted average (broad-based weighted average — weights by old and new share counts, milder compensation) can differ several-fold in a down round, and what it eats is, again, the equity of the founders and other shareholders.

Three of the most common misconceptions, and one Taiwan-local reminder

The first misconception is assuming a SAFE is always founder-friendly and investor-unfriendly. In reality the term design changes the outcome a lot — how the valuation cap, discount, and conversion terms are set is what actually decides where the risk lands; the name of the instrument tells you nothing. The second is assuming a priced round is always more professional; when the amount is very small and the company very early, an over-complex priced round only slows things down and inflates transaction cost, and may not be worth it. The third is looking only at valuation and not the next round — what early-stage investing really has to ask is whether the company can use this money to clear the next milestone and make the next round's investors willing to take over, not whether this round's valuation number looks good.

There is one more layer — a Taiwan-local enforcement gap you must brace for. The "participating liquidation preference" worked example above is there to explain the economic effect, but under the Taiwan Company Act, the design and enforcement of preferred-share (特別股) rights are constrained by the articles of incorporation and by regulation — it is not the case that whatever a Silicon Valley term sheet writes can run as-is on a Taiwan company; the same clause can have different enforceability under a Taiwan-incorporated company versus an offshore (e.g., Cayman, Delaware) holding structure. By the same token, a clause like drag-along (the right of majority shareholders to require minority shareholders to sell alongside them when the company is being sold) often needs supporting articles and multi-shareholder consent in Taiwan, and is not always as easy to exercise as the English term sheet makes it look on the surface. When you see these clauses, do not read them at face value — return to "under this company's actual jurisdiction of incorporation and its articles, is this clause even enforceable?" This is exactly why formal documents must be confirmed with a lawyer who knows Taiwan and cross-border startup deals.

The judgment to take away

When you read a term sheet, do not rush to ask "is this valuation a good deal?" First write down three things: why the company needs this instrument now, which clear milestone this round's capital is meant to buy, and what my rights and risks each are if the next round never happens or prices down. Think those three through and you will naturally shift from "comparing valuation size" to "watching how risk gets divided" — and that is what a term sheet is really about. Valuation decides how expensive your entry is; the clauses decide what you actually get whether the company succeeds or fails. The former is written on the most visible line; the latter is buried in the paragraphs you are most likely to skip. Whenever formal investment documents are involved, have a lawyer or professional who knows startup transactions (including Taiwan and cross-border structures) confirm the conversion, dilution, information rights, liquidation preference, and possible next-round impact before you sign.

Sources

• Y Combinator Safe Financing Documents
• YC, Seed Fundraising

This article is general educational information and a practitioner's orientation; it is not investment, legal, accounting, tax, or securities-law advice. Different markets, deal terms, and case specifics may call for different judgments, and formal investment decisions should still be independently verified.

Further reading

• Angel Investor Learning Path
• Investment Decisions & Terms
• Tech Investing Is Not About Intuition: How to Build Your Own 100-Point Evaluation Framework
• A SAFE Is Fast, but Not Always Simple: Valuation Cap, Discount, and Founder Dilution
• 51% Equity Is Not Control: Board Seats and Veto Rights in a Term Sheet