Term sheets are like prenups — no one loves them, but they define how messy (or clean) things get when real money hits the table.
And yet, too many founders treat them like a formality.
They skim them. They rely on Google.
Some even sign without fully understanding what they’ve just agreed to.
I’ve mentored over 100 founders across different funding rounds. If there’s one thing I’ve learned, it’s this:
The cost of misunderstanding a term sheet often shows up months later — when it’s too late to renegotiate.
Here’s what founders think matters… and what actually does.
1. It’s Not Just the Equity Percentage
Yes, the valuation and % equity offered get all the attention.
But the real power dynamics live in the clauses you skipped:
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Board Control
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Liquidation Preferences
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Anti-Dilution Rights
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Veto Powers (Protective Provisions)
These are the levers that determine who makes decisions, who gets paid first, and what happens if things go sideways.
I’ve seen founders give up just 15% equity… and lose full strategic control by the next quarter.
2. Liquidation Preference Is Where It All Starts
Ask a first-time founder what “1x participating preferred” means.
Most will guess. Some will bluff.
Here’s the harsh truth:
That clause can mean you get less than your employees in a moderate exit.
The investor gets their money back — plus their equity share — before you see anything.
What to do:
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Understand the difference between participating and non-participating
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Negotiate multiple rounds of investment with future liquidation stacking in mind
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3. Anti-Dilution: The Clause That Punishes You for a Down Round
Anti-dilution rights are often slipped in “by default.”
But in a down round, they mean the earlier investors get more equity — without paying more.
They get protected.
You get squeezed.
It’s technical. But it’s real.
What to do:
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Ask whether it’s full-ratchet or weighted-average
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Understand how it impacts your next raise and your remaining equity
4. Board Control: Who Actually Runs This Company?
It’s not just how many board seats investors get — it’s what decisions need board approval.
In one case I witnessed, a founder couldn’t launch a pricing experiment because the board “didn’t align with the risk.”
She wasn’t asking for another cheque — she was asking to test a price point.
That’s what she gave up when she agreed to board-level protective provisions… without realizing it.
5. It’s Not Just Legal. It’s Strategic.
Founders often rely on their lawyer to “handle the term sheet.”
But a lawyer can’t help you evaluate what’s fair, what’s normal, and what gives away too much optionality.
This is about strategy, not just legality.
You should walk into term sheet conversations knowing:
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What you can negotiate
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What you shouldn’t touch
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What the long-term impact will be
6. So What Should You Do Before You Sign Anything?
Here’s the checklist I give founders before they even respond to a term sheet:
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Do I fully understand all economic and control-related terms?
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What happens if I don’t hit my targets?
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Who controls my roadmap after this round?
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How will this impact my next raise?
And most importantly:
Do I have the leverage I think I do?
Final Thought
Term sheets don’t kill startups.
But misunderstanding them absolutely can.
The investors have read 100+ of these. You’ve maybe read two.
Balance the playing field — before you agree to anything.
If you want real-world breakdowns of how to handle term sheets, I go deep into this inside my Startup Fundraising Course — with examples, red flags, and prep questions that protect you.
Looking for Strategic Mentorship?
I’ve mentored dozens of startups, helping them avoid costly mistakes, scale sustainably, and navigate complex challenges.
If you’re ready to leverage strategic mentorship as a competitive advantage, book a free 30-minute consultation:
👉 https://links.thegreycells.com/BookAppointment
Success isn’t just about hard work. It’s about who’s guiding you.
With over two decades of experience in the software technology arena, having worked in multinational and SME companies in India, USA and Singapore in the capacity of programmer to CTO – I felt now was a good time to give back to the world what I have learnt in this journey. Even if it ends up benefitting a few of my readers by giving them insight or solving a technical issue, I think I will have achieved my mission!