Term Sheet Red Flags

Most of a term sheet is standard. A few clauses decide whether you still own the company in five years. Founders negotiate the valuation and miss the control terms. That is the expensive mistake. Valuation is the headline. Control is the operating system.

Read every term sheet as two documents stapled together: economics (who gets paid, in what order, how much) and control (who can stop you from doing the next thing). Fight the second list harder than the first.

This is not legal advice. It is the pattern-matching a seed or Series A founder needs before they call their lawyer. Get a seed-stage lawyer anyway. The hour you skip is the clause you live with.

Economics: what is normal, what is not

Valuation / cap. At seed this is often a SAFE cap, not a priced pre-money. At Series A it is a priced pre-money. A number you cannot grow into is worse than a slightly lower number you can. Do not win a vanity cap and lose the next round.

Liquidation preference. 1x non-participating is standard. That means investors get their money back first, or they convert to common and share pro-rata, whichever is more. Participating preferred ("they get their money back and they share") is a double dip. 2x or 3x preference is a distressed term. On a seed, it is a reason to walk unless the company is already in trouble.

Option pool shuffle. The term sheet often says the option pool will be "topped up to 10% or 15% on a pre-money basis." That pool comes out of the existing shareholders, which means you, not the new money. A 15% top-up on a priced seed can be more dilution than the check itself. Negotiate the pool size against a real hiring plan for 18 months, not a round number the fund uses on every deal.

Anti-dilution. Weighted-average anti-dilution is standard on a priced A. Full ratchet (the investor's price resets to the down-round price on every share) is hostile. SAFEs already have their own version of this via the cap. Do not layer both.

Dividends. Cumulative dividends that accrue whether or not you are profitable are leftover PE language. Strike them on a seed or A.

Control: the terms that actually bind you

Board composition. At seed, a common pattern is two founders, one investor, no independents yet. At A, it is often two founders, two investors, one independent. A board the investor controls on day one is a red flag at seed. A board you cannot outvote after a missed quarter is how founders get replaced.

Observer seats are cheap to give and expensive in a small room. One observer for the lead is fine. An observer for every fund is a second board.

Protective provisions (vetoes). Standard: a veto on selling the company, issuing senior stock, changing the charter, or increasing the option pool past an agreed size. Not standard: a veto on hiring, firing, raising any new money, changing the product, or signing customers above a tiny threshold. Each extra veto is a board meeting you now need for ordinary work.

Drag-along / tag-along. Drag-along lets a majority force a sale so a small holder cannot block it. Normal, if the threshold is a real majority of common and preferred voting together. A drag that the investor can trigger alone is not a drag. It is a sale option on your company.

Founder vesting. Re-vesting some of your already-owned shares at A is common. Re-vesting all of them, with a one-year cliff, as if you just joined, is a reset of your ownership. Push back. A portion, monthly over two to three years, with single-trigger acceleration on a termination without cause, is the conversation. Double-trigger acceleration (sale and you are let go) is the standard on a sale.

Pro-rata and super pro-rata. Pro-rata for the lead is normal and useful: they can follow on. Super pro-rata (the right to buy more than their percent in the next round) lets a seed investor eat the A. Limit it, time-box it, or decline it.

Side letters and "small" extras

Side letters are where the terms that would look ugly on the term sheet go to hide.

• MFN on a long-running SAFE raise can re-trade everyone when you cut the cap to close the last $200K.
• Information rights that require a board deck every month for a $50K angel.
• A "right of first negotiation" on a sale that scares off acquirers.
• A warrant sweetener that looks small and is not, once you do the ownership math.
• Most-favored pro-rata that extends a special right to anyone who later gets a better one.

If it is not on the term sheet, ask for every side letter before you sign. "We can do that in the long-form docs" is how founders agree to a clean sheet and close a different deal.

How to negotiate without poisoning the close

Decide in advance which list you are on.

Fight: participating preferred, >1x preference at seed, full ratchet, investor-controlled board at seed, vetoes on ordinary operations, super pro-rata that is uncapped, founder re-vest of 100% with a cliff, side letters you have not seen.

Trade: a slightly lower valuation against a cleaner pool, an observer seat against a board seat, a modest pro-rata against a super pro-rata.

Ignore: the exact form of standard weighted-average anti-dilution, the name of the Delaware counsel, most of the registration-rights boilerplate.

Do not negotiate by email essay. Mark a term sheet. Get on a call. Be specific: "1x non-participating, pool at 10% post-money based on this hiring plan, board is 2-1, no super pro-rata." Then stop talking.

If two term sheets arrive, do not use one as a theatrical exploding offer. Use the cleaner one as the reason you can say no to the ugly one. Funds talk. Theatrical process is remembered.

Red-flag table

Failure modes

1. Negotiating only the number. You can win the cap and lose the company.
2. Signing the sheet to "keep momentum" and fixing it in long-form. The term sheet is the deal. Long-form lawyers implement it. They do not reopen it.
3. Giving every angel a special right. Your A lead will make you unwind this, or walk.
4. No lawyer who does seed and A for a living. Your cousin's corporate attorney will miss the pool shuffle.
5. Using the [fundraising trip](/bay-area-fundraising-trip/) energy to rush a signature. The dinner was for the intro. The sheet is for a weekday morning with counsel on the line.
6. Accepting "this is standard" without asking standard for whom. Standard for a distressed late-stage deal is not standard for a seed with a pulse.