Term Sheet Nightmares: Clauses You Should Never Accept

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You just got a term sheet.

You're excited.

But buried in that 10-page document could be the thing that kills your company.

In this post, I’ll walk you through the worst clauses in term sheets—the ones that seem “standard” but quietly wreck founders.

Whether you're raising your first $500K or Series A, here’s what to watch for (and push back on hard).

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What is venture capital? - Metricson — **Term Sheet Nightmares: Clauses You Should Never Accept**

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What You’ll Learn

The sneaky clauses that trap founders
What each clause actually means (in plain English)
What’s negotiable vs non-negotiable
Internal links to Capitaly.vc’s best founder-raising content

1. Full Ratchet Anti-Dilution

Sounds harmless. It’s not.

What it does:
If you raise at a lower valuation later, early investors keep their original share percentage by massively diluting you.

Why it sucks:
Even a modest down round can wipe out your cap table.

What to do instead:
Push for weighted average anti-dilution—a fairer model.

2. Participating Preferred (Double-Dip)

What it means:
Investors get both their original money back and a share of profits like common shareholders.

Translation:
They win big. You, not so much.

Example:
$10M exit, $5M raised. Investor gets $5M back and 20% of the rest.

What to ask for:
Non-participating preferred with a clean 1x liquidation preference.

3. Multiple Liquidation Preferences

What to watch for:
1.5x or 2x liquidation preferences.

What that means:
If you sell for $10M, they get 2x their $2M before anyone else touches a dollar.

Why it’s bad:
If your exit isn’t a grand slam, you might walk away with nothing.

Push for:
1x liquidation preference. Period.

4. Pay-to-Play Clauses (With Penalties)

Hidden landmine:
If you don’t invest in future rounds, you lose your pro-rata or get converted to common stock.

Used by VCs to:
Force smaller investors or founders into bad terms later.

Fix:
Ask for reasonable “pro-rata participation” rights without punitive clauses.

5. Veto Rights That Kill Your Agility

These can include:

Veto over hiring
Veto over budgets
Veto over fundraising
Veto over M&A

The problem:
You become a puppet with board meetings for every decision.

What to do:
Limit vetoes to big decisions (like selling the company), not day-to-day ops.

6. Redemption Rights

What it means:
Investors can force you to buy back their shares after X years (usually 5–7).

Worst-case scenario:
They trigger redemption and you’re legally obligated to return their money—often when you don’t have it.

Negotiate:
Strike redemption rights entirely, or tie them to specific conditions (like failure to IPO/sell in 10 years).

7. Drag-Along Rights with No Floor

What it does:
Allows majority investors to force a sale—even at a price you hate.

Watch for:
No minimum price thresholds.

Solution:
Only allow drag-along rights above a fair valuation floor (e.g., 2x or 3x the last round).

8. Founder Vesting Resets

They’ll say:
“It aligns incentives.”

But really:
You’ve already done the hard part—starting the company. Now they want to vest your equity again.

Pushback with:
“I’m open to partial re-vesting with acceleration, but I’ve earned this stake.”

9. Board Control Tricks

Red flag:
2 out of 3 board seats go to investors, even in the seed round.

What happens:
You lose control early, and they call the shots—especially in down rounds or tough decisions.

Fix:
Maintain founder-friendly board structure:

1 founder
1 investor
1 independent agreed by both

10. Milestone-Based Tranches

What it means:
You only get your money if you hit future milestones.

Danger:
Unpredictable, slows hiring, delays product, and gives VCs ongoing leverage.

Alternative:
Raise in clearly defined rounds, not staged “maybe money.”

11. Excessive Information Rights

Risk:
VCs get to snoop on everything—customer names, contracts, salaries, even pipeline data.

In bad hands:
They can leak it, share it with competitors, or use it as leverage.

Negotiate:
Limit access to board-level summaries unless otherwise required.

12. Founder IP Assignment Gaps

Risk:
If you built anything pre-incorporation, they may require formal transfer—but might try to limit your ongoing rights.

Fix:
Have clear IP assignment docs early, reviewed by your own lawyer—not just theirs.

13. Nasty Option Pool Shuffling

What happens:
VCs force you to expand the employee option pool before they invest—so you take the dilution.

Trick:
They’ll say “it's for your team”—but the math punishes you.

Counter it:
Negotiate post-money pool expansion or reduce pool size after close.

14. Non-Compete + Broad Non-Solicits

Buried clause:
You can’t start anything remotely similar—or work with your own team for X years.

Fix:
Limit scope to reasonable:

1–2 years
Specific sector
Only current employees, not all talent

15. Confidentiality Gags (Forever)

Watch for:
Permanent silence clauses that stop you from ever sharing your lessons—even anonymously.

If they ask for it:
Ask why. You’re allowed to share your story (without breaching NDAs or trade secrets).

FAQs: Term Sheet Clauses Founders Should Watch For

Can I negotiate a term sheet?
Yes. It’s expected. Use a good lawyer and push back.

Is full ratchet anti-dilution ever acceptable?
Only if you’re out of options—and even then, expect to lose big later.

Should I walk away from a bad term sheet?
If it endangers your company’s future—yes.

Do VCs expect me to understand this stuff?
No—but they expect you to get help. That’s why founder communities and lawyers matter.

Is SAFE better than priced rounds?
SAFEs are faster, but hide cap table complexity. Know the trade-offs.

Related Capitaly.vc Posts

Conclusion

Term sheets aren’t just paperwork.

They’re blueprints for control.

Get them wrong, and you can lose your company before you even scale it.

Get them right, and you can raise millions—without selling your soul.

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