Term Sheet Red Flags: What to Watch Out For
Not all term sheet terms are equal. Some provisions that look innocuous at first glance can significantly affect founder outcomes at exit.
A term sheet is not just a valuation — it's a set of rights, protections, and controls that will govern your relationship with investors for years.
Participating Preferred — Most preferred shareholders choose between their liquidation preference and their pro-rata share of proceeds. Participating preferred holders get both.
Ratchet Anti-Dilution — Full ratchet anti-dilution is the most founder-unfriendly form. Weighted average is more reasonable.
Drag-Along Rights — These allow majority shareholders to force minority shareholders to approve a sale. Check who controls the trigger.
Pay-to-Play — A pay-to-play provision requires investors to participate in future funding rounds or lose certain rights.
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