Founders focus on valuation, and the terms surrounding it frequently determine outcomes more than the number does.
Economic and control terms
Terms determining who gets what money, and terms determining who decides things.
Which are negotiated separately and matter differently.
A high valuation with unfavourable control terms can be worse than the reverse.
Liquidation preference
Investors receiving their money back before common shareholders on a sale.
Which is standard at one times the investment.
Multiples above that, and participating preferences, change founder outcomes substantially in modest exits.
Participation
Whether preferred shareholders also share in remaining proceeds after their preference.
Which is the difference between participating and non-participating preferred.
Participating terms can produce outcomes where founders receive very little from a sale that looks successful.
Anti-dilution
Protection if a later round prices lower.
Which ranges from broad-based weighted average to full ratchet.
Full ratchet is severe and is generally resisted.
Board composition
Who sits on the board and how decisions are made.
Which determines control more directly than share ownership.
A founder can own a majority and lose control of the board.
Protective provisions
Investor consent required for defined decisions.
Which is standard and varies substantially in scope.
Broad provisions can require investor approval for ordinary operating decisions.
Option pool
Shares reserved for employees, generally created before the investment.
Which dilutes founders rather than investors.
Where the pool sits in the calculation materially affects the effective valuation.
Getting it right
Experienced counsel who has seen many of these is the difference between understanding what you signed and finding out later.
This is general description rather than legal advice.
Vesting
Founder shares earned over time rather than owned outright.
Which protects the company and remaining founders if someone leaves.
Investors generally require it, and founders who established it themselves are in a stronger position.
Pro rata rights
Investors keeping their percentage in later rounds.
Which is standard for meaningful investors.
It constrains how much of a later round is available to new participants.
Information rights
Regular financial reporting to investors.
Which is reasonable and should be scoped to something sustainable.
Excessive reporting obligations consume founder time at exactly the wrong stage.
Drag along and tag along
Provisions governing behaviour in a sale.
Which determine whether minority holders can be compelled to sell or can join a sale.
These matter enormously at exit and are negotiated at investment.
The practical advice
Model the outcomes at several exit values before signing, since the terms behave very differently across scenarios.
Convertible instruments
Notes and simple agreements converting to equity at a later round.
Which defer the valuation decision.
Caps and discounts determine the eventual conversion and are where the negotiation sits.
Stacking
Multiple convertible instruments with different caps.
Which can produce more dilution than founders expect at conversion.
Modelling the cap table after conversion before signing avoids the surprise.
Founder liquidity
Selling some founder shares in a round.
Which investors sometimes permit at later stages.
It reduces personal financial pressure and is negotiated separately.
Legal costs
The company frequently pays investor legal fees.
Which is standard and is worth capping.
Uncapped fee arrangements have produced substantial unexpected costs.
The summary
Terms determine outcomes more than valuation does, and modelling several exit scenarios before signing is the practical protection.
Board composition
Who sits on the board and how seats change with each round.
Which determines who decides the significant questions.
Founders frequently focus on ownership percentage and overlook that board control moves earlier.
Protective provisions
Decisions requiring investor consent regardless of ownership.
Which typically include selling the company, issuing new shares and changing the board.
A minority investor with broad protective provisions holds substantial practical control.
Option pool sizing
Whether the pool is created before or after the investment.
Which changes the effective price considerably.
Pre-money pools dilute founders alone and are the standard request.
Pro rata rights
The right to maintain ownership percentage in later rounds.
Which is reasonable and can crowd out new investors at later stages.
Information rights
Regular financial reporting obligations to investors.
Which is normal and creates real ongoing work.
Liquidation preference
Who gets paid first and how much before common shareholders receive anything.
Which determines outcomes in every exit below the optimistic case.
A one times non-participating preference is standard; participating preferences pay twice and change the maths substantially.
Anti-dilution
Protection for investors if a later round prices lower.
Which shifts dilution onto founders and employees when things go badly.
Broad-based weighted average is the common and moderate form; full ratchet is aggressive.
Vesting
Founder shares earned over time rather than owned outright.
Which investors require and which also protects co-founders from each other.
Four years with a one-year cliff remains the convention.
Drag-along and tag-along
Provisions governing what happens when a majority wants to sell.
Which affect whether minority holders can be compelled or protected.