Equity Understanding the not-so-fine print of 2022 term sheets
Jun 29, 2022
Becca Szkutak, a venture reporter for TechCrunch, dives into the evolving world of term sheets and what they reveal about investor-founder dynamics during economic downturns. She emphasizes the rise of anti-dilution provisions that protect investors while scrutinizing the push for more founder-friendly terms. Discussing the implications of liquidation preferences and governance shifts, Becca demystifies the complexities of negotiations, highlighting that down rounds might not spell disaster, but an opportunity for more equitable deals in the startup space.
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Anti-dilution Protection
- Investors are using anti-dilution clauses to protect themselves in down rounds.
- This practice, previously less common, is now becoming more formalized.
Liquidation Preferences
- Investors are asking for higher liquidation preferences (e.g., 2x or 3x).
- This ensures they recoup their investment in case of a liquidation event, even with a lower exit valuation.
Down Rounds vs. Liquidation Preferences
- Founders should consider raising at a down round rather than accepting high liquidation preferences.
- A down round can be better long-term than unfavorable terms impacting future growth.