At Zecca Ross Law, we specialize in helping founders navigate the legal complexities of startup financing. One of the most critical early steps in your company’s journey is reviewing term sheets from potential investors. While they may appear straightforward, certain provisions can jeopardize your startup’s control, financial health, and long-term flexibility. Below are key legal red flags we routinely help clients identify and address during negotiations:

Excessive Liquidation Preferences

Standard investor protection includes a 1x non-participating liquidation preference—investors get back what they put in before any proceeds are shared. However, terms offering multiples greater than 1x or participating preferences (where investors get their money back and participate in the remaining proceeds) can substantially erode returns for founders and early employees. These should be carefully negotiated to preserve upside potential.

Overreaching Anti-Dilution Provisions

Anti-dilution clauses protect investors if future rounds are priced lower than previous ones. While broad-based weighted average provisions are relatively fair, full ratchet clauses can be aggressive—adjusting the investor’s share price down fully to match the lower round, causing disproportionate dilution for founders. We help founders push back on overly punitive formulas.

Investor-Dominated Board Structures

Granting investors majority control of your board or extensive veto rights can undermine your ability to make strategic decisions for your company. A balanced board composition is essential for operational autonomy and long-term vision. At Zecca Ross Law, we ensure founders maintain enough leverage to execute confidently.

Restrictive Rights of First Refusal (ROFR)

ROFRs let existing investors buy new shares before outside parties. While standard, if structured too broadly or without an expiration, they can deter future investors. We recommend limiting these rights to one round and setting clear deadlines for execution.

Broad Drag-Along Rights

Drag-along provisions allow majority shareholders to force minority holders to sell during an acquisition. If thresholds are too low or protections are unclear, founders can be forced into unfavorable exits. We help ensure drag-along clauses are carefully drafted with protective triggers and fair processes.

Unreasonable Vesting or Re-Vesting

A standard vesting schedule is four years with a one-year cliff. Beware of proposals that extend vesting periods or require you to re-vest already earned equity as a condition for future investment. These terms can impact both your motivation and your stake in the company you built.

Overly Restrictive No-Shop Clauses

No-shop clauses prevent you from exploring alternative term sheets once discussions begin. While common, durations longer than 30–60 days can block better opportunities. We help founders strike a balance between exclusivity and flexibility.

Excessive Option Pool Requirements

Investors often require the creation of an option pool for future hires. However, if calculated pre-money, a large option pool directly dilutes the founders. We recommend sizing the pool based on a realistic hiring plan, not investor convenience.

Unfavorable Valuation Terms

An unrealistic valuation—too high or too low—can set your startup up for future down rounds or excessive early dilution. We work with founders to ensure the valuation accurately reflects the company’s current and projected worth, building a stable foundation for future funding.

Ambiguous Language and Undefined Terms

Every term sheet must be precise, consistent, and well-defined. Vague or open-ended language often leads to misinterpretation and legal disputes. Our team ensures your agreements are airtight from day one.

At Zecca Ross Law, we empower founders to negotiate from a position of strength—protecting your equity, your vision, and your company’s future. If you’re reviewing a term sheet, we’re here to help you understand the fine print and advocate for the terms you deserve.

Let’s build something lasting—on your terms.
Reach out to schedule a strategy call with our startup legal team.