Please Read Your Term Sheet
I've had this conversation too many times. Here's what I keep saying.
I’ve been getting a lot of DMs lately from founders asking for help with their fundraising. I love these conversations. But one pattern is starting to stress me out.
Founders keep reaching out after they’ve already signed something.
And look, I get it. You’ve been grinding for months to get a term sheet. When one finally lands, the last thing you want to do is slow down and read 20 pages of legal language. You want to celebrate. You want to close. You want to get back to building.
But here’s the thing: that document you just signed? It’s going to follow you for a long time. And some of what’s in it might genuinely surprise you when it matters most, usually at the exact moment you can’t do anything about it.
So let me share what I keep finding myself saying over and over again.
You’re probably negotiating the wrong thing
When founders get a term sheet, most of the energy goes into the valuation. Which, yes, matters! But valuation is the flashy number on the cover. The stuff that will actually determine what you walk away with is buried in the middle.
The terms that tend to hurt founders most:
Liquidation preferences are how investors protect their downside. A “1x non-participating preferred” is standard and reasonable: investors get their money back first, then everyone splits what’s left. But “2x participating preferred” means investors get twice their investment back, and then they participate in the remaining proceeds alongside you. In a modest exit, you might end up with almost nothing even if you technically own a big chunk of the company.
Anti-dilution provisions come into play if you ever have to raise at a lower valuation than your previous round. “Full ratchet” anti-dilution is the punishing version: it adjusts early investors’ share price down to match yours, which can massively dilute founders. “Broad-based weighted average” is what you want to see. If your term sheet says full ratchet, push back.
Board composition is where founders quietly lose control of their companies. A 2-investor, 1-founder, 2-independent structure sounds balanced. It often isn’t. Investors frequently influence who fills those “independent” seats. If you’re not paying attention to who controls the board, you may find yourself unable to make major company decisions without permission.
Drag-along rights let investors force a sale of your company even if you don’t want to sell. The scope of this clause matters enormously. Without meaningful carve-outs it can override your own judgment on the most important decision you’ll ever face.
Protective provisions give investors veto power over things like new equity, taking on debt, or acquisitions. Reasonable in scope, fine. Overly broad, and you’re running every significant decision through your investors before you can act.
A few other categories worth knowing:
Information rights
Right to receive financial statements (monthly, quarterly, annual)
Right to inspect books and records
These can create ongoing obligations and, in some cases, securities law complications as the cap table grows
Registration rights
Demand rights — investors can force the company to register shares for a public offering
Piggyback rights — investors can include their shares in any IPO you do
These matter most at exit and can complicate or delay a liquidity event
Right of first refusal (ROFR)
Company or investors get the right to buy shares before a founder or employee can sell to a third party
Can make secondary sales very difficult and lock up liquidity
Co-sale rights (tag-along)
If a founder sells shares, investors can sell alongside them on the same terms
Limits a founder’s ability to do a partial exit quietly
Pre-emption / pro-rata rights
Investors can maintain their ownership percentage in future rounds
Can crowd out new investors you actually want in, and creates friction in later rounds
Redemption rights
Investors can force the company to buy back their shares after a certain period
Rare but dangerous — can create a forced liquidation if the company hasn’t exited
No-shop / exclusivity clauses
Once you sign an LOI or term sheet, you typically can’t shop the deal
The length and scope of these matters a lot, especially in acquisition scenarios
Founder vesting and acceleration
Single vs. double trigger acceleration on acquisition
Who controls the vesting schedule post-acquisition
Most founders don’t think hard enough about what happens to unvested shares if they get pushed out
Let’s talk actual numbers, because this is where it gets real
Abstract explanations only go so far. So let’s run a scenario.
You’ve raised $10M total ($2M seed, $8M Series A). You own 60% of the company. Your company sells for $30M. Here’s what you actually get depending on how your term sheet was structured:
With 1x non-participating preferred (the good version): Investors take their $10M back. The remaining $20M gets split by ownership. You get 60% of $20M = $12M.
With 1x participating preferred: Investors take $10M back, then also participate in the remaining $20M. They take 40% of that ($8M). You get 60% of $20M = $12M at a $30M exit. Same result, but run it at $15M.
At a $15M exit with 1x participating: investors take $10M first. $5M left. They take 40% of that ($2M). You get $3M. On a $15M exit. With 60% ownership. That’s the participating preferred tax.
With 2x participating preferred (the trap): Investors take 2x their money ($20M) before you see anything. $10M left. You get 60% of that = $6M.
Six million dollars. On a $30M exit. When you own 60% of the company.
That’s the scenario where founders who “won” on valuation still feel like they lost. And it happens more than people talk about. Run your own numbers at $10M, $30M, $75M, and $200M outcomes before you sign anything. Most founders are genuinely shocked when they do this for the first time.
One more thing nobody tells you: early terms compound
What you agree to in your seed round doesn’t just affect that round. It sets a template. Series B investors will scrutinize your existing terms during diligence. A messy or founder-unfriendly cap table is a red flag that can depress your valuation or kill a deal entirely.
The choices you make when you’re small echo forward in ways that are really hard to undo.
If you’re a CPG founder, there’s a whole other layer
I keep getting pulled into a more specific version of this conversation with consumer brand founders, so I want to address it directly.
Everything above applies to you too. But acquisitions in CPG come with a set of landmines that just don’t come up in generic fundraising advice. Founders usually learn about them at the closing table.
Your retailer deductions are probably a liability you don’t know you’re carrying. Retailers take deductions all the time: damaged goods, promotional allowances, compliance fines. If you haven’t been actively managing and disputing these, an acquirer will find them in diligence. What felt like operational noise becomes a purchase price reduction or an escrow holdback you’ll spend a year fighting over.
The working capital peg is not a formality. Every acquisition involves an adjustment to make sure the business is delivered in the shape you agreed on. In CPG, you’re carrying inventory, trade receivables, and promotional liabilities. How “working capital” gets defined, and when the target is set, can move your final payout by hundreds of thousands of dollars. Get a transaction-specific accountant involved, not just your regular CPA.
Go read your distributor agreement right now. UNFI, KeHE, regional DSD. Many of these contracts have change-of-control provisions that let the distributor renegotiate or walk when you get acquired. If your earnout is tied to velocity or door count and your distribution gets disrupted post-close, your earnout evaporates with it. This is fixable before you sign an LOI. Very hard to fix after.
A velocity-based earnout is only as good as your acquirer’s commitment to the brand. SPINS data sounds objective. But velocity is downstream of decisions your acquirer makes: which accounts to push, how much promo support the brand gets, whether their sales team prioritizes your SKUs at all. If they control the inputs to your metric, you need contractual protections baked in, or you need more money upfront.
SPINS and Nielsen can be used against you in the final stretch. If your velocity has softened for any reason (seasonally, temporarily, whatever) a sophisticated buyer will show up in the last few weeks before close and use that data to ask for a lower price. They’ve run this play before. Know your own numbers better than they do going in.
Plan for the escrow not coming back in full. Standard CPG deals hold 10-15% in escrow for 12-18 months. Acquirers routinely draw on it via deduction claims and warranty disputes. By the time you’re deep in post-close integration, fighting over old escrow claims is exhausting and demoralizing. If the deal only works for you if you get all the escrow back, that’s worth knowing upfront.
If you are the brand, read your deal structure very carefully. If your face is the marketing and your relationships are the retail accounts, the acquirer is buying access to you as much as the company. That often means a lower upfront, a bigger earnout, and retention terms with clawbacks if you leave early. Understand exactly what “cause” means in your agreement if they push you out before the earnout ends. It happens more than people admit.
Things worth bookmarking
Here are the resources I point founders to most:
NVCA Model Legal Documents The industry baseline. The National Venture Capital Association publishes model term sheets that establish what “standard” actually looks like. If your terms look different, you want to know why.
Series Seed Documents Open-source, founder-friendly seed documents. Great reference for early-stage rounds and a useful gut-check on what reasonable looks like.
Venture Deals by Brad Feld and Jason Mendelson The most readable book on this topic. It actually explains what terms mean and why investors push for them. Read it before your first raise, not after.
Y Combinator’s Standard Documents YC publishes their deal documents publicly. A useful benchmark regardless of whether you went through YC.
Carta’s Learning Center Good practical resources on cap tables, dilution, and equity. Their waterfall modeling tools are useful if you want to run your own scenarios.
Both Sides of the Table by Mark Suster Mark is a VC who writes honestly about how investors think. His posts on term sheets are some of the most candid things written on this topic from the investor side.
The founders reaching out to me aren’t careless. They’re moving fast, they’re excited, and they don’t want to seem difficult when something finally feels like it’s going right. I get that completely.
But take the time. Read the document. Ask the questions that feel awkward. A good investor won’t hold it against you, and a bad investor who does is showing you something important.
The version of you that makes it to a real exit will be glad you slowed down.