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Participating preferred stock is like a double-edged sword. It allows investors to get their guaranteed payout plus a share in any extra funds

Make sure you understand if investors are getting a flat payout or if they’re pulling from both sides of the deal

Valuation is key. Pre-money vs. post-money can drastically change how much equity you retain

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11. Control Over Intellectual Property Ensure clauses don’t give investors undue control over IP, especially in case of disputes or liquidation. 12. No-Shop Clause A clause preventing you from negotiating with other investors after signing the term sheet. Limit the duration to a reasonable period (e.g., 30-45 days). 13. Founder Roles and Employment Terms regarding your continued employment as a founder. Ensure the terms are fair and protect you from being sidelined or replaced easily. 14. Pay-to-Play Requires investors to participate in future rounds to retain certain rights. While this can protect you, ensure it doesn't backfire during tough fundraising rounds. 15. Confidentiality and Non-Compete Non-compete clauses should not overly restrict your ability to work in the industry if things don’t work out. How to Protect Yourself 1. Hire a Lawyer 2. Negotiate Understand the Implications: Know how each term impacts the company’s valuation, governance, and your own future.

6. Voting Rights and Protective Provisions Be cautious of clauses requiring investor consent for major decisions (e.g., issuing new shares, raising debt, or approving budgets). Excessive protective provisions can limit operational flexibility. 7. Drag-Along and Tag-Along Rights Drag-Along: Investors forcing founders to sell their shares during an acquisition can affect your exit plans. Tag-Along: Protects minority shareholders (often positive but still worth reviewing). 8. Exit Clauses Investors might impose mandatory exit timelines (e.g., requiring an IPO within 5-7 years). This could pressure the business into premature decisions. 9. Pro Rata Rights Investors may request the right to maintain their ownership in future funding rounds. Be prepared for this during growth stages. 10. Dividend Preferences Watch for cumulative dividends, which can add a growing liability to preferred shares over time.

3. Board Composition Ensure a fair balance between founder representation and investor control on the board. Limit clauses that allow investors to unilaterally appoint directors or have veto rights over key decisions. 4. Founder Vesting/Cliffs Re-vesting of founder equity is often proposed. Understand vesting schedules, cliffs, and any potential risk of losing shares if you exit prematurely. --- 5. Anti-Dilution Protection Full Ratchet vs. Weighted Average: Full ratchet protection can significantly dilute founders in future down rounds. Aim for a "broad-based weighted average" clause to minimize dilution risks.