1 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.
2 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.
3 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.
4 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.
5 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.
6 VOTING RIGHTS & VETO POWER
Check for:
Investor veto on:
- Hiring
- Fundraising
- Spending
- Acquisition
- Strategy pivots
Too many vetoes = puppet show.
7 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
8 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.
9 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.
11 PERFORMANCE MILESTONES
Beware of:
Funding tied to unrealistic targets
Operational control hidden in language
12 RIGHTS OF FIRST REFUSAL (ROFR)
Investor gets first right
if founder sells shares.
Normal.
If investor restricts founder liquidity unfairly.
13 INFORMATION RIGHTS
Reasonable:
Monthly updates
Quarterly review
Annual audit
Insane:
Daily KPIs
Access into operations
Founder micromanagement
14 CONFIDENTIALITY & NON-COMPETE
Overly broad non-competes
Lifetime restriction language
Founders are not prisoners.
15 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.