Having started 2 companies and personally invested in a few dozen more, I thought I was reasonably familiar with how startup investments were structured and what deal terms were common.

That changed when I moved back to Southeast Asia. I started seeing deal terms I had never seen before or had mostly disappeared in San Francisco (SF). In most cases, they were deal terms designed to (1) provide downside protection, (2) decrease risk or (3) grant rights typically reserved for larger investors in later rounds. Great for investors, not so good for founders.

I was even more shocked to learn how often founders were accepting these terms. I think this is happening for a few reasons.

1. Lack of Education – Often founders accepted these terms without really understanding how they worked or the impact they might have on their startup in the long run.
2. Lack of Agency – Often founder accepted these terms because they didn’t think they could or know how to negotiate with investors.
3. Lack of Competition – There isn’t enough competition among investors to force them to be more founder friendly.

To help, I wanted to put together a list of terms that we think founders should watch out for, how they work and how they might impact your startup in the future. These are terms that, in my experience, founders often misunderstand and tend to be less founder friendly than I would like.

To be clear, just because something is on this list doesn’t mean it’s bad. There might be situations where accepting one of these terms makes sense. It’s a founders responsibility to understand how they work and to push back when they think it’s not in the best interest of their company.

Terms to Watch For

Anti-Dilution Clauses

These clauses provide downside protection to investors and protect them from losing too much ownership if the company raises a future round at a lower valuation. In a down round, the clause adjusts their ownership to mitigate the impact of the lower valuation.

There are 2 versions of this.

1. Weighted Average Anti-Dilution – This is the more common, founder-friendly version. It adjusts the investor’s share price down a bit, based on how many new shares are issued and at what price. It’s a compromise between protecting the investor and being fair to founders and employees.
2. Full Ratchet Anti-Dilution – This is a more aggressive, less founder-friendly version. If a down round happens, the investor’s original shares get repriced as if they had paid the new lower price, regardless of the number of new shares issued.

This is challenging for founders because they’ll be diluted more to compensate. To bring in new capital, dilution has to occur somewhere. In the event of a down round, the more aggressive the anti-dilution clause, the more the dilution is taken by the founders and employee group versus the investors.

Ultimately, down rounds are not something anyone wants to see unfold, but when they do, you want to come out the other end in the best shape possible and that is why anti-dilution clauses can become important. Why? Because if a founder owns too little of their company at an early stage, future investors are less likely to invest. They may worry the founder will not be sufficiently motivated, or subsequent investors to them may be put off, or a large founder top-up may be forced upon the cap table at a later point that would dilute earlier investors.

So, you have investors who don’t want to share in the dilution in the event of a down round and then future investors that might not invest if the founders have been diluted too much.

Early Board Seats for Small Investors

Be mindful of small investors (like $50K) in an early-stage startup who ask for a board seat. This might not seem like a big deal but often becomes problematic later.

1. Outsized Influence for Minimal Investment – Board seats matter. They are a formal governance form, have voting rights on major decisions, and access to all company information. You don’t want to give someone that much power without significant skin in the game.
2. Difficult to Remove – It’s possible to remove people from the board, but it’s difficult and painful. Unless they step down voluntarily, you will have to negotiate their exit, which is awkward and often involves giving them monetary compensation.
3. Discourages Future Investors – Later-stage investors pay attention to the current board structure before investing. If they see a small investor with a board seat, they’ll wonder two things. First, is this person going to be productive board member given their investment? Second, why am I investing $2M for 1 board seat when this person invested $50K for one? Worst case, the new investor walks away or won’t invest without restructuring, delaying your round.

Charging Interest

Today, SAFE Notes dominate the early-stage venture landscape. SAFE Notes were created by YC to provide a fast, easy, standardized way to invest in startups. We use them to invest at Iterative and so do the vast majority of early-stage VCs and angels from Singapore to SF.

While in diminishing frequency, convertible loan notes are still being used and of notable difference to the SAFE Note, convertibles can typically include an interest charge on top of the principal amount invested. Given convertibles are bespoke and not standardized, they can have different features and the interest can manifest in different ways, with different impacts:

1. Interest Paid in Equity – This is more common. If an investor wants the interest paid in equity (i.e. the principal + the accrued interest converts to equity at the particular share price), you may give up more of the company than hoped. Say an investor invests $100K in a convertible note with 6% interest and you don’t raise a priced round for 2 years. Now you owe them $112K worth of equity or 12.4% more than anticipated.
2. Interest Paid in Cash – This is less common. If an investor wants cash interest, the investment feels more like a loan. Say an investor invests $100K at 6% interest for 2 years. Each year, you’ll pay $6K or $12K total from the $100K. Effectively, you’ve traded $100K worth of equity for $88K.

In both cases, it might not seem like much, but it compounds with larger rounds and longer timelines.

A couple of reasons why interest is problematic.

• Shorter Runway, Longer Path to Profitability – Paying interest in cash is challenging for startups since they often won’t be profitable for years and lack cash. It shortens your runway and lengthens the process to profitability.
• Incentive Misalignment – As with all deals, you want maximum alignment between parties. Charging interest creates misalignment because investors benefit from a founder taking more time to fundraise, and now the founder is incentivized to raise faster.
• Cap Table Complexity – Calculating accrued interest across multiple investors, start dates, and rates makes an already complex process even more so.
• Future Investor Scrutiny – If some investors are charging the company interest, especially in cash, a future investor might be less likely to invest. They want their investment to go towards making the company successful, not repaying a prior investor.

Excessive Information and Audit Rights

Excessive is subjective, but here are a few things we advise our companies to watch out for, especially at a very early stage.

• Too Frequent and Detailed Reporting – Be mindful if an investor requests very detailed reporting too often (ie. weekly). If you’re a 3-month-old company, with 3 people and no revenue, you shouldn’t spend most of your time on financial projections and operating plans.
• Rights for Small Investors – Be mindful of reporting and audit rights for small investors. You don’t want to spend most of your time on reporting to someone who invested $25K.
• Unrestricted Audit Rights – While rare, be mindful of clauses allowing investors to audit you anytime without a material reason.

Information and audit rights are important for investors. Proper and timely reporting is part of your job running a company. I’m highlighting situations where it’s overkill, typically for early-stage companies and small investors.

Investor Veto Rights and “Reserved Matters”

This gives investors the right to block or approve certain company decisions, even without board seats or majority ownership.

These rights typically involve...

1. Major Business Decisions – Approving annual budgets, business plans, or changing the core business model.
2. Hiring and Compensation – Having a say in hiring executives or approving compensation plans.
3. Exit Opportunities – Blocking potential acquisitions or IPO plans if they don't approve.

Excessive veto rights can be problematic for a few reasons.

• Operational Slowdown – When speed is a competitive advantage, needing investor approval for key decisions can slow down a startup.
• Founder Disempowerment – It shifts power away from founders who are closest to the business and have the most context.
• Strategic Misalignment – An investor might block a decision that doesn't align with their fund goals or timeline, even if it's good for the company.
• Future Fundraising Issues – New investors may hesitate to invest if existing investors have extensive control rights.

This might sound scarier than it actually is. In fact, it’s relatively common for later stage companies (Series A+) and often it’s used as more of a threat than an actual legal block. But for early stage companies, I think it hurts more than it helps.

Liquidation Preference

This determines money distribution when a company is sold.

Here's how it works and what to watch for.

1. 1x Non-Participating Preference – This is the standard and most founder-friendly version. If the company sells for a higher valuation than the investor paid at investment, the liquidation preference usually doesn’t come into play and the investor will convert to common shares and take their pro rata share. If the company sells below the entry valuation that the investor paid, then the investor gets 1x their money back first (assuming no other investors above them in the preference stack, in which case those investors may be the first to be paid), then the rest of proceeds are paid out to the other shareholders pro rata according to ownership percentages.
2. Above 1x Multiple on Investment – Any liquidation preference with the multiple set at above 1x is considered quite aggressive. We have seen certain investors ask for 2-3x in what amounts to a preferred return that can impact the ability of founders, employees and earlier investors to see a financial return commensurate with their shareholding. It can also be particularly treacherous in the event of a sale that occurs at a value below the round of the investment. For example, if you raise a big Series C, call it $100m from Investor X at a $400m post-money valuation, and you then go on to sell the business for $300m. 100% of those proceeds will flow to that investor if they had a 3x multiple on their liquidation preference.
3. Participating Preference – This is considered quite aggressive too. Investors get their money back first AND share in the remaining proceeds based on their ownership percentage. This "double-dipping" can significantly reduce founder payouts.
4. Stacked Preferences – Finally, it is just important to be aware that these liquidation preferences stack up as you go through the funding rounds. Founders and employees, as common shareholders (read: no preference) sit at the bottom of this stack so in the event of liquidation preferences being triggered, you are typically the last group to see cash… if there is any left for you at all.

Why this matters...

• Misaligned Incentives – Investors might push for a medium-sized exit that guarantees their return while founders get little, with high multiples or participating preferences.
• Complicated Waterfall Calculations – Complex stack of liquidation preferences across different rounds can make it difficult to model out the cash waterfall when assessing a sale.
• Reduced Founder Upside – In modest exits, founders might end up with little after preferences are paid out.

Milestone Investing

Investors commit to invest, but they release funds only when the company hits specific milestones.

Here are the structure and challenges.

1. Pre-Agreed Milestones – These could be revenue targets, user growth, product launches, or other business metrics.
2. Same Valuation Despite Progress – Even though the company has increased in value by hitting the milestone, the investment typically happens at the original valuation.
3. Binary Outcome – To get the funding, hit the milestone exactly. Miss it slightly, and you might get nothing.

Problems with this approach.

• Catch-22 Situation – You need funding to hit the milestone, but you only get funding after hitting it.
• Inflexible Business Planning – Startups often pivot or reprioritize based on what they learn. Rigid milestones can force companies to pursue less optimal paths.
• Valuation Disconnect – If you've hit significant milestones, your company is worth more, but you're still giving equity at the old valuation.
• Increased Uncertainty – You can't count on the funding until you hit the milestone, making financial planning difficult.

We haven’t seen this as much lately but it’s still something I want founders to be aware of.

Program Fees

This is when investors charge startups a fee to join their program or receive their investment.

This typically comes in...

1. Accelerator Fees – Some accelerators take equity AND charge a program fee, ranging from a few thousand to tens of thousands of dollars.
2. Investment Processing Fees – Fees charged to process the investment, often a percentage of the total investment.
3. Ongoing Management Fees – Regular payments for continued "support" beyond the initial investment.

Why are these problematic:

• Double Compensation – Investors are compensated through equity appreciation. Fees ensure they profit regardless of the company’s success.
• Cash Drain – Every dollar paid in fees is a dollar not spent on growth, product development, or runway extension.
• Signal to Other Investors – High-quality investors typically don't charge fees. When future investors see these arrangements, it can raise red flags about your existing investors' quality.
• Misaligned Incentives – If investors profit from fees, they're less motivated to help the company succeed in the long-term.

What to Do

If you receive a term sheet with some of the above terms, here's what you can do.

1. Understand the Terms

This may seem obvious, but you’d be shocked at how often founders are surprised by something they agreed to. This typically happens because they didn’t read the agreement carefully or didn’t fully understand a term.

• Read Everything – This seems obvious, but these terms are often buried in the fine print.
• Ask Other Founders or Investors – If you encounter an unfamiliar term, ask other founders or a trusted existing investor. They’re typically involved in multiple deals and can provide perspective. If you don’t have anyone to ask, e-mail (hsuken@) or DM me on Linkedin.
• Calculate the Impact – I often say “do the math,” but it’s especially true here. Model different scenarios to see how these terms affect you in various exit or future fundraising situations.

2. Generate Leverage

Your negotiation ability depends on your leverage. The more an investor wants to invest in your startup, the more willing they’ll be to negotiate.

The 3 most common ways to generate leverage are...

• Strong Growth – If your startup is growing fast or has strong metrics, there’s a higher chance the investor will have strong conviction to invest. The stronger the conviction, the more likely they’ll negotiate.
• Multiple Term Sheets – Having multiple interested investors gives you options. If you don’t like the terms of one term sheet, you can go back to an investor and get it removed.
• Time on Your Side – If all else fails and you have 6+ months of runway, you might walk away from this deal and generate interest from other investors.

3. Negotiate

Once you understand the terms and have generated as much leverage as possible, it’s time to negotiate. Remember that every term is negotiable, but choose your battles carefully.

• Focus on the Big Issues – Concentrate on terms that significantly impact your control or economics (liquidation preferences, board control, veto rights).
• Suggest Alternatives – Don't just reject terms; offer market-standard alternatives that protect both parties.
• Trade Off Strategically – Be willing to accept less favorable terms to remove the most problematic ones.
• Use Market Standards – Reference standard terms from organizations like Y Combinator, Iterative, or other investors.

Negotiations require compromise. You won’t get everything you want but hopefully you can avoid some onerous terms.

Negotiating is also a great way to learn what the working relationship might be like. I have some very savvy friends who negotiate for no other reason than to see how the other party handles themselves. If an investor is overly aggressive, unwilling to negotiate, and acting like you’re lucky to be talking to them, maybe think twice. If an investor is empathetic and addressing your concerns, that’s a promising start.

Your Responsibility

Having been a founder, I know fundraising is painful and runway gets short. After all of the rejection, when you finally get a term sheet, a part of you (more than you’re willing to admit) just wants to accept the terms so you can stop fundraising and get back to building.

In that moment, it’s important to remember that understanding and pushing back on terms you don’t think are in the long term interest of your startup, is your responsibility. Not the investor’s.

My hope is by making founders more aware of these terms, how they work and the long term impact they could have on their startup, founders can make more informed decisions about the deals they are agreeing to.

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Thanks to Gavin Walsh for filling in the finer details on how some of these terms work and what’s more or less common now.