Why it matters
Tranching is sometimes reasonable: in capital-intensive deals, deep-tech, or biotech, milestones are how investors manage real technical risk. In typical software venture, tranching is a tool for control. The investor announces a $10M round, books the headline number, but only releases $4M up front. The remaining $6M is contingent on milestones the investor controls (revenue targets, hiring plans, product launches). If you miss, the cap rebuilds at a much lower price — sometimes a punitive one — with all the leverage on the investor's side. The headline valuation becomes fiction.
How to negotiate
Where possible, take a smaller round at a fair price rather than a tranched round at an inflated headline. If tranching is unavoidable, define milestones objectively (auditable metrics, not subjective judgements), put the milestone determination on the board (not just the investor), set the trigger price equal to the original round price (not a re-priced valuation), and include automatic release if the company is performing materially above plan even if a specific milestone is delayed.
Example language
How this clause typically appears in a term sheet. Read it carefully — predatory language is often buried in routine paragraphs.
The Investment shall be funded in two tranches: $4,000,000 at the Closing and $6,000,000 upon the Company achieving the Performance Milestones, as determined by the Lead Investor in its sole discretion.
TURNSHEET provides intelligence, not legal advice. This page describes typical market behaviour and common negotiation tactics; your specific deal may have nuances that change the analysis. Always review your term sheet with qualified legal counsel before signing.