Every clause that quietly costs founders, indexed and explained.
A free, plain-English reference for the language inside VC term sheets. Read it before you raise. Read it during diligence. Read it before your lawyer's billable hour starts.
3× Liquidation Preference
The investor gets back three times their money before founders or employees see a single dollar at exit.
Full-Ratchet Anti-Dilution
If you raise your next round at a lower valuation, the investor's shares are repriced as if they had paid that lower price all along — and your equity is wiped out to compensate them.
Participating Preferred (Double-Dip)
The investor gets their preference back AND their pro-rata share of whatever's left — so they get paid twice from the same exit.
Drag-Along Without Threshold
Investors can force you to sell the company without a meaningful approval threshold from common shareholders.
IPO Ratchet Clause
If your IPO prices below a guaranteed return for the investor, additional shares are issued to top them up — diluting everyone else, including you.
VC Majority Board Control
The investors hold more board seats than the founders, giving them final say on hiring, firing, strategy, and your job.
Management Fee Clause
The investor charges the company an ongoing 'management fee' or 'monitoring fee' — the company pays the VC for the privilege of having taken their money.
Founder Clawback Provisions
If the company fails to hit specific milestones, founders forfeit a portion of their already-vested equity back to the company (or to the investors).
Founder Vesting Reset
All your founder equity that has already vested gets reset and you have to re-earn it from scratch at the closing of this investment.
Redemption Rights
After a set period (often 5 years), the investor can demand the company buy back their shares for cash — even if it bankrupts the company.
Expanded Protective Provisions
The investor gets veto rights over routine operational decisions — hiring senior staff, signing leases, making contracts above modest thresholds.
No-Shop Period Over 60 Days
You agree not to talk to any other investors for more than two months while this firm conducts diligence.
Hidden Exclusivity / Stand-Still
Buried provisions that quietly extend the no-shop, prohibit you from raising any other capital (including debt), or restrict normal commercial activity during diligence.
Narrow-Based Weighted Average
A milder anti-dilution formula than full ratchet, but still tilted against founders compared to the broad-based standard.
Cumulative Dividends
The investor accrues a guaranteed dividend (typically 6-8% per year) that compounds and is paid out — on top of the preference — at exit.
Milestone-Based Tranching
The investment is split into chunks, with later tranches contingent on the company hitting specific milestones — leaving you exposed if a milestone slips.
VC-Only Pro-Rata Rights
The investors get the right to maintain their ownership in future rounds — but founders don't get the same right.
Asymmetric Co-Sale
If founders sell shares, the investor can join the sale on equal terms — but not vice versa. The investor can sell freely without offering you the same right.
VC-Only Right of First Refusal
If you receive an outside offer to buy your shares, the investor has the right to match it and buy them instead — but the right doesn't run the other way.
Aggressive IP Assignment
Founders are required to assign to the company a broad sweep of pre-existing IP, side projects, and even ideas conceived during but unrelated to the company's business.
Founder Non-Compete
If you leave the company, you are restricted from working in the same industry — or starting a competing company — for a defined period.
Monthly Board Pack Required
You are required to produce a full board-quality reporting pack every month instead of the standard quarterly cadence.
Aggressive Registration Rights
Investors can force the company to register their shares for sale (i.e. compel an IPO process) on terms that favour them and burden the company.
Founder Loan & Compensation Caps
Caps on founder salaries and prohibitions on the company lending money to or guaranteeing obligations of founders, often set at unreasonably low levels.
Secondary Transfer Restrictions
Founders are prohibited from selling any shares in a secondary transaction without majority investor consent — even small amounts for personal liquidity.
Most-Favoured-Nation in Side Letter
A side letter that automatically grants the investor any better economic or governance term given to any future investor — effectively letting them retro-actively rewrite their deal.
Excessive Information Rights
Beyond the standard board pack, the investor demands access to operational systems, raw customer data, employee records, or unfettered inspection rights at short notice.
Investor Expense Cap (Excessive)
The company reimburses the investor's legal and diligence expenses up to a cap — and the cap is set unusually high.
Key-Person Investor Clause
If a specific founder leaves or dies, the investor gets enhanced rights — extra board seats, accelerated redemption, or veto rights they wouldn't otherwise have.
Pay-to-Play (Absent)
There is no pay-to-play clause. Existing investors don't have to follow on in tough rounds to keep their preferred-share rights.