- Persuade & Raise
- Posts
- ♞ Term Sheet Clauses To Watch For
Category 1: The Equity Destruction Mechanics
These clauses are designed to protect the investor's downside by obliterating your ownership percentage when things don't go perfectly.
The Repricing Trap (Full Ratchet Anti-Dilution)
If your company faces a challenging market and has to raise capital at a lower valuation, this mechanism forces a complete reset. Instead of finding a middle ground, the early investor's shares are retroactively priced as if they bought in at the new, lower rate. If a down-round cuts your share price in half, the investor's share count instantly doubles, shifting the entire burden of dilution onto the founding team.
The Double-Dip (Uncapped Participating Preferred)
In a standard deal, investors choose between getting their principal back or taking their percentage of the sale. This clause lets them do both. If a company sells for $30M after a $5M investment, a participating investor takes their $5M off the top, and then claims their percentage of the remaining $25M. It ensures the house always wins extra, leaving the team with a fraction of what the cap table promises.
The Multiplier Menace (Multiple Liquidation Preferences)
A standard 1x preference ensures investors get their money back first if things go sideways. But predatory terms push this to 2x or 3x. If an entity invests $10M with a 3x preference and the company sells for a modest $25M, the investor claims $30M. They take the entire sale price, leaving the founders and employees with exactly zero.
The Post-Money SAFE Loophole
Even the standard templates used in early-stage fundraising carry hidden structural traps. Modern post-money conversion rules guarantee early backers a fixed percentage of the company that cannot be diluted by subsequent convertible notes. If you raise multiple unpriced rounds back-to-back, those early notes don't dilute each other; they stack their dilution exclusively against the founders. You can easily give away half your company before ever hitting a priced equity round.
Stop wasting your scarcest asset on endless sales cycles and compress months of one-to-one networking loops into a single afternoon. Join LEADR founder Taylor Conroy live to master the three-step framework that over seven hundred business owners use to scale client acquisition from the stage. Secure your free spot for the June 11th webinar now to walk away with a high-converting authority marketing funnel and a live bonus ebook.
Category 2: Power Grabs and Control Shifts
These terms don't just take your money; they take your sovereignty. They shift decision-making authority from the builders to the financiers.
The Boardroom Takeover (Full Board Control)
The moment an investment group secures a majority of your board seats, you are no longer the boss; you are an employee. With a simple vote, outside investors can alter your strategy, veto capital allocations, or remove you from your own executive seat.
Forced Liquidation (Redemption Rights)
This clause allows investors to demand that the company buy back their shares at cost after a set period, usually three to five years. It effectively converts an equity investment into a high-pressure loan. If the company lacks the cash to pay them out, it triggers a forced fire sale or insolvency.
Corporate Puppeteering (Extensive Protective Provisions)
While investors need a say in major structural changes, predatory terms expand this veto power to day-to-day operations. If you need investor signatures to hire a manager, adjust a product roadmap, or change an engineering tool, your execution will grind to a halt.
Category 3: Leverage Blockers and Hidden Costs
These clauses create artificial friction, making future fundraising rounds or talent acquisition incredibly difficult.
Super Pro-Rata Rights: This gives early backers the right to expand their ownership percentage in future rounds, rather than just maintaining it. It crowds out new institutional lead investors and destroys your negotiating leverage.
The Golden Handcuff Reset (Founder Vesting Reset): Investors frequently ask founders to re-vest their equity over four years to ensure long-term commitment. However, resetting this entirely to zero after years of prior sacrifice means you technically own nothing on the day the cash arrives, creating a massive structural vulnerability for the leadership team.
Milestone-Based Tranches: Splitting a round into performance-based payouts shifts all the operational risk back to the founders. Early-stage assumptions change constantly; tying your survival capital to rigid, arbitrary targets allows investors to starve your company if you pivot.
The Valuation Illusion (Pre-Money Option Pool Expansions): Investors often mandate a massive employee option pool increase right before a round closes. By forcing this expansion before the investment hits, the dilution is borne entirely by the existing shareholders, artificially driving down your true pre-money valuation.
Speak naturally. Send without fixing.
Wispr Flow turns your voice into clean, professional text you can send the moment you stop talking. Not rough transcription you have to clean up. Actual polished text — ready for email, Slack, or any app.
Speak the way you think. Go on tangents. Change your mind mid-sentence. Flow strips the filler, fixes the grammar, and gives you text that reads like you spent five minutes writing it.
89% of messages sent with zero edits. Millions of professionals use Flow daily, including teams at OpenAI, Vercel, and Clay. Works on Mac, Windows, and iPhone.
Are you looking to grow your business? Here is how I can help:
📱 Book a Strategy Call to get 1:1 feedback on your pitch, pitch deck and/or fundraising strategy. (If you need general startup advice, then reply to this email, and I’ll let you know if/how I can help.)
Onwards and Upwards,
Sponsored By:
