Founders negotiate hardest on valuation, which is one term among many and frequently not the one that determines the outcome.
Pre-money and post-money
The distinction that catches people at the first negotiation.
Pre-money valuation is the company's value before the investment. Post-money is after.
Which means the same headline number produces different ownership depending on which is meant, and the difference matters more as the round size grows relative to the valuation.
The option pool is the related trap — if a new pool is created pre-money, existing shareholders bear the dilution rather than the incoming investor.
Liquidation preference
The term that most determines outcomes in anything other than a large exit.
It specifies what investors receive before common shareholders on a sale.
A one-times non-participating preference means the investor takes their money back or converts to common shares, whichever is better for them, but not both.
A participating preference means they take their money back and then share in the remainder, which is substantially worse for founders.
Multiples above one — two times, three times — mean the investor takes a multiple of their investment before anyone else receives anything.
Which means a company can sell for a substantial sum with founders receiving nothing, and this happens regularly.
The stack
Preferences accumulate across rounds, and later investors generally rank ahead of earlier ones.
Which means the total preference stack can exceed a realistic sale price after several rounds, at which point common shares are worthless regardless of the company's apparent success.
Calculating the stack against plausible exit values is the exercise founders should do at every round and frequently do not.
Anti-dilution
Protection for investors if a later round prices lower.
Full ratchet adjusts the earlier investor's price to the new lower price entirely, which is severe.
Weighted average adjusts partly, based on the size of the new round, and is the more common and more reasonable form.
The effect falls on founders and employees, since the adjustment issues additional shares to earlier investors.
Board composition
Who controls the company, which is distinct from who owns it.
Board seats allocated to investors, founders and independents determine decision-making on hiring, fundraising and sale.
Which means a founder retaining majority ownership can lose control through board structure, and this is a common outcome.
Protective provisions
Matters requiring investor consent regardless of board or shareholder votes.
Typically including sale of the company, issuing new shares, taking on debt, changing the business substantially and altering the share structure.
Which means investors hold a veto over the decisions that matter most, and the list is negotiable in scope even where its existence is not.
Vesting
Founder shares typically subject to vesting over a period, with a cliff.
Which protects the company and the remaining founders if someone leaves early, and it is generally reasonable.
Acceleration provisions on a sale or on termination without cause are worth negotiating, and are frequently overlooked.
What to do about it
Engage a lawyer experienced in this specific area, since general commercial lawyers miss things that specialists treat as routine.
Model the outcome at several exit values rather than only the optimistic one.
And be aware that terms compound across rounds, so accepting an unfavourable term once establishes a precedent later investors will match.
This is a description of common structures and not legal or financial advice on any specific transaction.
Convertible instruments
Common at the earliest stage and worth understanding separately, since they defer the valuation question rather than answering it.
A convertible note is debt converting to equity at a future round, generally at a discount and subject to a valuation cap.
Simple agreements for future equity work similarly without being debt, which removes interest and maturity but not the conversion mechanics.
The valuation cap is the term that matters — it sets the maximum valuation at which the instrument converts, which determines the investor's effective ownership.
Multiple instruments with different caps stacking up before a priced round produce dilution that founders frequently have not modelled, and the discovery generally comes at the worst moment.
Information rights
Obligations to provide financial statements, budgets and updates at defined intervals.
Which are reasonable and become burdensome when many investors each hold separate rights.
Setting a threshold, so that only holders above a certain stake receive detailed reporting, keeps this manageable as the cap table grows.
Pro rata rights
The right to invest in future rounds to maintain ownership percentage.
Which is valuable to investors and constrains future rounds, since the allocation available to a new lead is reduced.
Super pro rata rights, allowing an investor to increase their share, are more restrictive still and worth resisting at early stages.
Drag along and tag along
Provisions governing what happens on a sale.
Drag along allows a majority to compel minority holders to sell on the same terms, which prevents small holders blocking a transaction.
Tag along allows minority holders to join a sale on the same terms, which prevents majority holders selling and leaving them behind.
Both are generally reasonable and the thresholds at which they operate are negotiable and consequential.