A term sheet is a non-binding document, but its terms define the economic and governance structure of your company for years — sometimes forever. Many founders accept term sheets with minimal negotiation, either because they're excited about the investment, nervous about losing the deal, or simply don't know what to look for.
Participating preferred gives investors double-dip economics in an acquisition: they get their liquidation preference back first, then also participate pro-rata in any remaining proceeds. In a small exit, this can wipe out founder returns entirely. Non-participating preferred is the market standard — push back on participation.
Full-ratchet anti-dilution provisions — which reprice investor shares to the lowest price in any down round — are extremely founder-unfriendly. Weighted-average anti-dilution (broad-based) is the market standard and a far more reasonable protection.
Protective provisions that give investors veto rights over routine business decisions can handcuff your ability to operate. Reasonable protective provisions cover major structural events; unreasonable ones intrude on operational decisions.
Any board structure that gives investors a majority before the company is ready for it is problematic. Watch for terms that give the lead investor two seats while founders retain one, or that allow the investor to designate the independent director without founder approval.
Drag-along rights allow a majority of investors to force all shareholders to approve a sale. If the triggering threshold is too low, a small group of investors can force a sale at an inopportune time without meaningful founder consent.
No-shop provisions prevent you from soliciting competing offers during the deal. A no-shop that runs for 90+ days without meaningful penalties for investor failure to close gives investors undue leverage. 30–45 days is more appropriate.
Provisions that grant unlimited inspection rights or real-time financial reporting can create competitive intelligence risks if investors are involved in similar companies.
Zecca Ross Law reviews term sheets with founders before any negotiation begins — identifying provisions that deviate from market standards and advising on what to push back on, what to accept, and how to structure counterproposals that preserve both the deal and founder protections.
Legal clarity starts here. Partner with Zecca Ross Law Firm to transform complexity into opportunity.