1️⃣ VALUATION: THE NUMBER THAT LIES THE MOST
• Pre-money & Post-money
Pre-money = Value before investment
Post-money = Pre + investment
🚩 Trick:
Some investors quote post-money as if it’s pre-money to inflate ego.
2️⃣ EQUITY: WHAT YOU’RE SELLING (FOREVER)
• Percentage Offered
Higher valuation + higher dilution = false happiness.
✅ Focus on:
- Clean cap table
- Long-term ownership
- Control protection
🚩 Be afraid if:
They demand >25% in early rounds.
3️⃣ LIQUIDATION PREFERENCE: “WHO EATS FIRST”
Tells you who gets paid first during exit.
Types:
✅ 1x Non-Participating
Fair. Investor gets either:
- Their money back OR
- Their equity share
✅ 1x Participating
Investor gets:
- Their money back
AND - Equity share again
This is greed in legal costume.
🚩 Avoid multiple preference (2x, 3x).
That’s daylight robbery.
4️⃣ ANTI-DILUTION: “PROTECT ME FROM FAILURE”
Protects investor if you raise future rounds cheaply.
Types:
✅ Weighted Average
Normal.
🚩 Full Ratchet
Investor resets shares ruthlessly.
Founder massacre enabled.
Avoid.
5️⃣ BOARD COMPOSITION: “WHO ACTUALLY RUNS THE COMPANY”
Usually:
Founder seat
Investor seat
Independent seat
🚩 If investor dominates board.
Your salary is next. Then your job.
6️⃣ VOTING RIGHTS & VETO POWER
Check for:
🚩 Investor veto on:
- Hiring
- Fundraising
- Spending
- Acquisition
- Strategy pivots
Too many vetoes = puppet show.
7️⃣ FOUNDERS’ VESTING: “WE DON’T TRUST YOU YET”
Investors may re-vest your shares.
✅ Normal: 4 years with 1-year cliff
🚩 Red Flag:
- Reverse vesting on existing shares
- Unfair acceleration clauses
8️⃣ DRAG-ALONG & TAG-ALONG
• Drag-along
Majority can force you to sell.
Fair — if thresholds are reasonable.
• Tag-along
You can sell along if investor exits.
Founder protection clause. Good.
9️⃣ ESOP POOL
Typically 5–15%.
🚩 Red Flag:
Investor forces ESOP creation
before valuation to dilute only founders.
🔟 EXIT CLAUSES
Look for terms like:
🚩 “Investor can force exit after X years”
🚩 “Mandatory liquidity event”
Walk away.
You’re building a company — not a countdown bomb.
1️⃣1️⃣ PERFORMANCE MILESTONES
Beware of:
🚩 Funding tied to unrealistic targets
🚩 Operational control hidden in language
1️⃣2️⃣ RIGHTS OF FIRST REFUSAL (ROFR)
Investor gets first right
if founder sells shares.
Normal.
🚩 If investor restricts founder liquidity unfairly.
1️⃣3️⃣ INFORMATION RIGHTS
Reasonable:
✅ Monthly updates
✅ Quarterly review
✅ Annual audit
Insane:
🚩 Daily KPIs
🚩 Access into operations
🚩 Founder micromanagement
1️⃣4️⃣ CONFIDENTIALITY & NON-COMPETE
🚩 Overly broad non-competes
🚩 Lifetime restriction language
Founders are not prisoners.
1️⃣5️⃣ LEGAL COSTS
🚩 If founder pays investor’s legal bill.
Hard no.
💣 FINAL REALITY BOMB
If you don’t understand it —
don’t sign it.
Term sheets are written to protect capital — not dignity.
✅ THE GOLDEN RULE
Every clause removes freedom.
Only accept clauses that protect fairness.