Term Sheet Analyser

A 1x non-participating liquidation preference means investors get back 1x their investment before common shareholders receive anything in a sale. They do not also participate in remaining proceeds. This is the standard, founder-friendly structure. If the exit is large enough, investors will choose to convert to common and share proportionally instead.

With participating preferred (also called 'double-dip'), investors first receive their liquidation preference then also share in remaining proceeds alongside common shareholders. This significantly reduces founder and employee payouts in medium-sized exits. Capped participation limits this second bite to a fixed multiple (e.g. 3x total) and is a reasonable compromise.

Broad-based weighted average anti-dilution adjusts the investor's conversion price proportionally when new shares are issued at a lower price. This is the standard and fairest protection. It penalises founders less than full ratchet, which resets the investor's price to the new lower price regardless of round size.

Full ratchet automatically adjusts the investor's conversion price to match any lower price in a future financing, no matter how small. Even one share issued at a lower price triggers the full ratchet. This can severely dilute founders in a down round. Most experienced founders push back hard against this term.

A typical Series A board has 5 seats: 2 founders, 2 investors, and 1 independent director (agreed by both sides). A 3-2 board (3 founders, 2 investors) is increasingly common at seed. Boards with investor majority (3 investors, 2 founders) are aggressive and should be negotiated carefully.

Pro-rata rights give an investor the right to participate in future rounds to maintain their ownership percentage. Standard pro-rata is limited to the investor's current stake. Super pro-rata allows investors to buy more than their share, crowding out new investors. Standard pro-rata to existing investors is reasonable; super pro-rata warrants scrutiny.

A drag-along clause requires all shareholders to vote in favour of a sale if a threshold approves it. Standard drag-alongs require majority preferred, majority common, and board approval. Aggressive drag-alongs can be triggered by investors alone, removing the common shareholders' veto on exit decisions.

Pay-to-play requires existing preferred investors to participate in future rounds or lose certain rights — most commonly converting to common. This protects against investors who benefit from protective provisions but refuse to support the company in difficult rounds. For founders, pay-to-play provisions are generally helpful.