Read time : 3 min
The first time you see a term sheet, it feels like validation.
Finally. Someone believes in you.
But buried in those 5–7 pages of “standard clauses” are traps that have cost founders millions, and in some cases, their companies.
I’ve seen it happen.
Here are the 3 big ones I wish someone had shown me earlier.
1. The option pool shuffle A founder I coached raised $3M seed.“We just need you to top up the option pool to 20% before the round. Totally standard.”
She signed. Didn’t think much of it.
Six months later, when she modeled her cap table again, she realized she’d effectively given away an extra 12% ownership. The investor hadn’t budged an inch. The dilution was all on her side.
That 20%? It wasn’t “totally standard.” It was leverage.
👉 Action: Check your draft. If the option pool sits “pre-money,” you’re eating all the dilution. Push it post-money. Cap it at 10–15%.
2. Liquidation preference creep Another founder sold his climate hardware startup for $40M.
He thought he’d walk away with life-changing money.
Why?2x participating preference.
So at exit:
Investors first took $16M (2x). Then they shared pro-rata in the remaining $24M. He told me later:
“I’d built a $40M company and felt like an employee with a bonus.”
👉 Action: Never accept more than 1x non-participating . Circle it, bold it, put it on your fridge. Anything else = 🚩.
3. Full ratchet anti-dilution This one is the silent killer.
I knew a founder who raised at a $12M valuation.
Sounds painful, but survivable.full ratchet clause.
That meant his early investors reset their ownership as if they’d invested at the $6M valuation. Overnight, his personal stake shrank by 25%.
He texted me that night:
“I thought I’d raised capital. Turns out I’d signed a time bomb.”
👉 Action: Read your anti-dilution clause. If it says “full ratchet,” don’t walk, run. Accept only weighted average .
TL;DR Option pool shuffle = hidden dilution.Liquidation preference creep = double-dipping investors.Full ratchet = cap table death spiral.Your term sheet isn’t just paperwork.
So here’s my advice:
You don’t need to be a lawyer.
Founder tools that will give you the ultimate unfair advantage:
✍️ The Term Sheet template every founder should have The Ultimate Investors List of Lists (12,000 VCs, FOs, Angels)40 pitch decks that built Unicorns The Ultimate Notion Data Room (all key docs you’ll EVER need)The Most Successful Investor Update Template The Only Finance Tracker Your Startup Needs
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