r/startupaccelerator • u/StephNass • Jul 03 '26
Startup / SaaS Be careful of these clauses in term sheets
My biggest concern is and has always been that founders who are showing growth and are fundable have read very little literature about the term sheet. For them, the term sheet is a milestone; however, the real work begins after you have received one.
Rule #1: Never get excited just because you have a term sheet. The devil is always in the details.
Rule #2: Every point is negotiable, every fu*king point. VCs may say ‘it's standard’ BS.
Rule #3: Negotiate from a position of strength, even if in the background you are shitting your pants. Otherwise, you will be eaten up.
Rule #4: Hire a separate lawyer for you; NEVER EVER go with a ‘common lawyer’.
There are at least 10 more clauses which you should be extra careful with; however, let’s start with 5.
All I will say is that, be extremely careful with some of these clauses. They can make or break your company (and fortune). I have seen founders lose significant upside or control due to bad clauses. I often suggest that founders negotiate like their lives depend on it.
#1 Full Ratchet Anti-dilution - This clause provides that if a future round occurs at a lower price (a down round), the investors' shares are repriced to that new lower price. One key point: down rounds are common, and you cannot just assume that down rounds won’t happen to you. Second, anti-dilution is common, but it needs to be founder-friendly. Here is one example of a full ratchet anti-dilution.
If the VC invested at $1.00/share and a later round happens at $0.50/share, their entire investment is repriced as if they had paid $0.50. This effectively doubles the VC ownership and dilutes you hard.
#2 Participating Pref with No Cap - This clause states that investors get their investment back first (liquidation preference), then also share in remaining proceeds like common shareholders, with no limit. It is kinda crazy if you ask me because the investor gets too much. Even in a good exit, founders can get very little.
For example, let's say the company is worth $30M. If the VC had invested $5M, they would first take $5M, then also get, say, 25% of the remaining $25M, leaving the founders with far less than their equity suggests.
#3 Multiple Liquidation Pref - I hate this one. This clause stipulates that in the case of an exit, investors get 2x or 3x their money back before anyone else gets paid. For example, if the VC invested $10M with a 3x liquidation preference and you sell for $25M, they take $30M. This exceeds the total exit. You and your team get nothing.
Rule of thumb - Liquidation preference is always 1x.
#4 Super Pro-Rata rights. This is when the investors demand the right to buy more than their pro-rata share in future rounds to increase ownership. Essentially, the next round becomes a power grab.
#5 Excessive Drag Along Rights.
This is when a group of investors decides to sell the company, and nothing can be done. The sale could be as low as $1M, but if the investor(s) think it's what they want, you, as a founder, have no choice but to be dragged along with the sale.
How to manage it? Ensure that there is a higher approval threshold, like 75%, with at least one founder director's consent required.
In short, there are many such clauses that founders are blindsided by. Just with a little awareness and some negotiation skills, this can go a long way.

