Term sheets are written by their lawyers. Know what you're giving up.
Liquidation preferences that pay investors twice before you see a dollar. Anti-dilution terms that crush founders in a down round. Understand your term sheet before you sign away equity.
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What Investment Agreement agreements hide in plain sight
The most common red flags we catch in this contract type.
Investors get their money back AND their pro-rata share of the remainder — double-dipping on exit.
Re-prices investor shares as if they invested at the new low — massive founder dilution.
A small investor group can trigger a whole-company sale regardless of founder preference.
Investors can demand cash back after a defined period — a hidden solvency risk.
The three things that decide whether your Investment Agreement holds up
A term sheet is not a shopping list — every clause interacts with every other clause. A 1x non-participating preferred sounds reasonable and is. A 2x participating preferred with broad drag-along sounds only slightly worse and is catastrophic on exit: investors get 2x their money AND their pro-rata share of the remainder, and can force the sale.
Anti-dilution is the second compounding lever. Broad-based weighted average is the market structure and is fair to both sides in a down round. Full ratchet re-prices ALL of the investor's shares at the new low price — a small down round can wipe out founder equity entirely. This is often buried in a schedule and easy to miss.
The option pool shuffle is the quietest founder tax. Investors ask for a 15-20% pool 'created pre-money' — which means the founders bear all of the dilution while the investor gets the same ownership at a lower effective price. Push the option pool to post-money or reduce the size to match hiring plans.
What ContractScan AI analyzes in your Investment Agreement
A dedicated playbook — built for this contract type only.
- Liquidation preference
Type (participating vs non-participating) and multiple.
- Anti-dilution type
Broad-based weighted average (market) vs full ratchet (founder-hostile).
- Pro-rata rights
Scope and whether they extend to later rounds.
- Board composition
Investor seats vs founder seats and observer rights.
- Drag-along rights
Threshold to trigger, board approval requirement, and protections for minority.
- Information rights
Reporting frequency, financials, and observer access.
- Founder vesting
Cliff, schedule, and acceleration on termination or acquisition.
- Redemption rights
When investors can force buyback and the cash impact.
Red flags we see in real Investment Agreements
Specific patterns to check for before you sign — with the fix for each.
Double-dips on exit. Push to 1x non-participating.
Founder-hostile in any down round. Broad-based weighted average is the market.
Comes entirely out of the founders. Reduce or move to post-money.
A minority investor group can force a sale. Set the threshold at 50%+ of common.
How to negotiate a Investment Agreement
The concrete asks we recommend, in the order to raise them.
- 1Lock 1x non-participating preferred as the liquidation preference
- 2Insist on broad-based weighted average anti-dilution
- 3Move the option pool post-money or reduce to match a real hiring plan
- 4Cap drag-along at 50%+ of common, including a majority of founders
- 53-person board at seed: 2 founders + 1 investor (or independent)
- 6Redemption rights only after 7+ years and only if the company is cash-positive
Here's what your report looks like
Plain English. No legal jargon. Action you can take today.
Investors get their money back AND their pro-rata share of the remainder — double-dipping on exit.
Re-prices investor shares as if they invested at the new low — massive founder dilution.
A small investor group can trigger a whole-company sale regardless of founder preference.
A bad term sheet doesn't feel bad on the day the wire lands. It feels bad four years later, when a modest acquisition offer arrives and the founders discover that after liquidation preferences, participation, and anti-dilution adjustments, they clear less than a year's salary each. Fix the term sheet in week one — you cannot renegotiate on the eve of an exit.
Who uses this
Spot founder-unfriendly terms before signing the term sheet.
Validate that the term sheet matches market norms.
Understand exactly how new investor rights reshape your cap table.
Frequently asked questions
What is a liquidation preference?
Who gets paid first — and how much — when the company is sold. 1x non-participating is founder-friendly. Participating preferred with a high multiple can mean founders receive very little even in a good exit.
Full-ratchet vs weighted-average anti-dilution?
Full-ratchet resets investor price to the new lower price in a down round — extreme dilution for founders. Weighted-average adjusts proportionally — far more founder-friendly and market standard.
What board composition is reasonable at seed?
One investor, one founder, one independent director is market standard. Investors taking board majority at seed is aggressive — push back.
Ready to check your Investment Agreement?
Upload your contract and get an AI review in under a minute — written in plain English with one clear recommendation per clause.