Term sheet red flags: the clauses that decide who wins

1. The liquidation preference: multiple and participation

The preference decides who is paid first, and how much, when the company is sold. Two dials matter: the multiple (how many times their money investors get back first) and whether the stock is participating (whether they then also share in what's left).

• 1x non-participating is the standard: the investor takes the greater of their money back or their as-converted share — never both.
• A multiple above 1x is off-market outside distressed rounds. A 2x preference means the first two dollars of proceeds per dollar invested go to the investor.
• Participating preferred is a 'double dip'. If it is conceded at all it is usually capped — commonly at 2–3x total return.

What to ask for: 1x non-participating. If you must give something, trade a cap on participation before you trade the multiple.

In the rulebook: Liquidation preference multiple · Participation rights

2. The option pool: pre-money vs. post-money

Investors want a pool big enough to hire against. That's reasonable — but where the pool is created decides who pays for it. A pool carved out of the pre-money valuation dilutes only existing holders.

Pools are commonly 10–15% of the post-money capitalisation, sized to a 12–24 month hiring plan. Ask for the pool to be sized to an actual hiring plan (show the plan), and either measured post-money or credited against the valuation.

In the rulebook: Option pool

3. Anti-dilution: weighted-average vs. full ratchet

Anti-dilution protects an investor if you later raise at a lower price. The form is a large lever on your ownership in a bad outcome.

Broad-based weighted-average is the market standard; a full ratchet is rare outside distressed rounds. If you see one, treat it as a deal-breaker rather than a line to trade.

In the rulebook: Full-ratchet anti-dilution · Weighted-average anti-dilution

4. Control: the board and redemption

Early-stage boards are typically balanced — founder seats, an investor seat, and often an independent both sides agree on. An investor-designated majority hands them control over hiring and firing and over a sale from day one.

Redemption rights (the investor can force the company to buy back its shares after a set number of years) and cumulative dividends (a preference that grows each year you stay private) are uncommon in venture term sheets and are worth pushing back on hard.

In the rulebook: Investor board control · Redemption rights · Cumulative dividends

5. Your own equity: founder re-vesting and acceleration

Investors reasonably want founders locked in. But re-vesting shares you've already earned from zero — 'a fresh four-year vest from closing' — gives them leverage over you and discards the years you've already put in.

• Ask for credit for time served (so only the unvested portion re-vests).
• Ask for double-trigger acceleration: unvested equity vests if the company is acquired and you are then let go without cause.

In the rulebook: Founder re-vesting · Vesting acceleration

6. The no-shop: the clause that removes your leverage

A no-shop bars you from talking to other investors while the lead does diligence. Thirty to forty-five days is typical; beyond about sixty is off-market at seed or Series A. The danger is timing: a long exclusivity window means that if the investor re-trades terms late, you have no alternative to walk to.

Ask for 30 days, and for the exclusivity to fall away automatically if the investor changes the terms.

In the rulebook: No-shop / exclusivity

Using this well

Rank what you can't accept (a full ratchet, redemption, an investor-controlled board) apart from what you'd trade (the size of the pool, the length of the no-shop). Negotiate the first group early and make concessions on the second group in exchange for something specific.

Clarity's instant check reads a term sheet against every rule on this page and cites the clause it flagged. It's decision support, not legal advice — have a lawyer review the final documents.