Every term sheet has one number everyone focuses on: the valuation. It's the part that gets tweeted, celebrated, and remembered, but the two or three pages around that number contain the clauses that actually decide what happens next - when you sell, when you raise again, or when things don't go to plan.
Founders rarely miss this out of carelessness, it is usually a timing problem.
A term sheet arrives after weeks or months of pitching, and by the time it lands, the instinct is to move fast - read the top line, feel the relief, sign, and let the lawyers handle the rest.
Term sheets are typically short, two to four pages, and deliberately simpler than the fifty-page shareholders' agreement that follows, and that kind of simplicity is exactly why they get signed too quickly.
Most of these clauses never cause a problem; they sit dormant for years and they only matter at the exact moment a company is under stress - a difficult exit, a down round, a disagreement about direction - which is precisely when a founder least wants to discover what they actually agreed to. Here's what's worth understanding before you sign a startup term sheet.
What Happens If You Sell for Less Than Everyone Hoped
Liquidation preference is the clause that decides who gets paid first, and how much exactly, when a company is sold or wound up. Most UK term sheets specify a 1x non-participating preference, meaning investors get their money back before anyone else sees a penny, but don't also take a share of what's left.
That sounds reasonable, and it usually is, but the trouble starts with participating preferred stock, where investors get their money back and then still participate in the remaining proceeds alongside ordinary shareholders. On a modest exit, this can leave founders and employees with meaningfully less than the headline valuation implied.
Ask your investor: If the company is sold, who gets paid first, and is the liquidation preference participating or non-participating? Is it capped?
Who controls the next funding round?
Pro-rata rights let existing investors maintain their ownership percentage by participating in future rounds, which is reasonable in principle since it rewards investors who backed you early and want to keep backing you.
The question founders forget to ask is what happens if an investor doesn't want to participate, but also doesn't want anyone else to either. Some term sheets include a right of first refusal that can slow down or complicate bringing in new investors at the next stage, particularly if a smaller existing investor sits on the cap table and drags out negotiations.
Ask your investor: If you don't participate in the next round, what rights do you keep, and could those rights delay or complicate future fundraising?
What You're Actually Agreeing to Report
Information rights sound administrative, though they're not always and standard information rights include quarterly management accounts and an annual budget, which is reasonable and expected.
Where this gets complicated is when a single small investor negotiates board observer rights or detailed monthly reporting requirements that go beyond what other investors on the same round receive.
Across several investors from different rounds, each with slightly different reporting demands, the cumulative admin burden on a founder can become genuinely significant - disproportionate to how much of the company any single one of those investors actually holds.
Ask your investor: Exactly what reporting will I be expected to provide, how often, and will every investor receive the same information?
Who can force the company to be sold?
Drag-along rights allow a defined majority of shareholders to force all other shareholders to sell their shares if a sale is agreed, preventing a small minority from blocking an otherwise sensible exit.
This is generally fair and standard practice.
The detail that matters is the threshold. Is it a majority of all shareholders, or specifically a majority of preferred shareholders? The latter allows investors alone - without any support from founders or employee shareholders - to force a sale of the company. That's a meaningfully different arrangement than one requiring broad shareholder consensus, and it only becomes visible when a founder and their investors genuinely disagree about timing, price, or direction — which is precisely why it's worth understanding in advance rather than in the moment.
Ask your investor: Who can approve a sale of the company, and what voting threshold applies?
What Anti-Dilution Actually Protects
Anti-dilution provisions protect investors if the company later raises money at a lower valuation than the current round - a down round. The mechanism recalculates the investor's effective price per share to reflect the new, lower valuation, which increases their ownership percentage without them paying anything further.
Broad-based weighted average anti-dilution is the standard, founder-reasonable version of this clause in the UK. Full ratchet anti-dilution is a much more aggressive alternative, where the investor's shares are repriced to the full new lower price regardless of how much new stock was actually issued. In a genuine down round, these anti-dilution provisions can, in their full ratchet form, meaningfully dilute founders and early employees beyond what most people would consider proportionate.
Ask your investor: Is the anti-dilution provision broad-based weighted average or full ratchet, and what would that mean for founder ownership if we raise at a lower valuation?
The Conversation Worth Having Before You Sign
None of these clauses are inherently unfair, and investors taking real risk is exactly why reasonable protections are a normal part of the arrangement. The real issue lies when most founders, particularly on a first fundraise, don't fully understand what they're agreeing to until the clause actually gets triggered, usually at the worst possible moment, during a difficult sale, a down round, or a disagreement about the company's direction.
A good lawyer will walk you through all of this, but lawyers respond to the questions you ask them, and most founders don't know which questions to ask until it's too late to matter.
The five questions above take perhaps twenty minutes to raise directly with your investor before signing a startup term sheet.
They rarely change whether a deal happens.
They occasionally change the terms meaningfully in a founder's favour and they consistently mean a founder understands exactly what they've agreed to, rather than discovering it later, in a boardroom, at the exact moment it matters most.
Worth asking: which of these five conversations have you actually had on your last startup term sheet?
Also Read: UK Startup Funding: How Founders Are Keeping More Equity
Editorial Note: This piece draws on standard UK venture financing practice and commonly used term sheet structures rather than any single dated report - the mechanics here (liquidation preferences, pro-rata rights, drag-along, anti-dilution provisions) are established market convention, not figures that shift year to year. Founders wanting to go deeper should ask their own solicitor to walk through their specific term sheet clause by clause; general guidance is never a substitute for advice on the document actually in front of you.
