Spot The Fake: Term Sheet Edition

Test Your Term Sheet Knowledge

Can you spot the fake? Here are two term sheets for the same stage company. One is a founder's dream. The other is a trap.

Option A

• Pre-seed SaaS startup raising $500K
• $4M valuation cap
• 2x liquidation preference
• Full ratchet anti-dilution

Option B

• Pre-seed SaaS startup raising $500K
• $4M valuation cap
• 1x non-participating liquidation preference
• Broad-based weighted average anti-dilution

The Verdict

Option B is the good deal. Option A is the trap.

Here's why:

• 2x liquidation preference (Option A) means investors get 2x their money back before founders see a dime. In a downside scenario, this can wipe out the founders entirely.
• Full ratchet anti-dilution (Option A) means if the company raises at a lower valuation later, the investor's price gets adjusted down dollar-for-dollar. This is extremely founder-unfriendly.
• 1x non-participating (Option B) is market-standard and fair — investors get their money back once, then convert to common stock.
• Broad-based weighted average (Option B) is the standard anti-dilution protection that's fair to both sides.

The Lesson

Term sheets aren't about valuation. They're about control, downside protection, and alignment. Always read the fine print — and always have a lawyer who specializes in venture deals review before signing.