Gagan is the CEO of Wows Global, a matchmaking platform for startups and investors in Asia.
Previously he was a board member and Group CFO of Deliveree, one of the fastest growing on-demand logistics companies in SEA.
Guest Author: Gagan Singh
As founders, safeguarding your startup’s future is paramount, and scrutinizing term sheets is your armor against potential pitfalls.
Here are five red flags to watch out for before you leap into a VC partnership:
1. Draconian Liquidation Preferences: Be wary of term sheets that feature exorbitant liquidation preferences i.e “Participative Rights” or “Higher Multiples”.
While it’s natural for investors to want to protect their investments, negotiating a balanced preference is crucial to avoid getting the short end of the stick during exit scenarios.
2. Founder Unfriendly Vesting Schedules: Your sweat equity should be rewarded fairly.
If the term sheet proposes a vesting schedule that locks you in for too long or leaves you with a meager equity stake, consider whether the trade-off is worth it.
3. Opaque Anti-Dilution Provisions: Keep an eye out for complex anti-dilution clauses that could lead to substantial equity dilution for you and your team.
Make sure any anti-dilution provisions are clearly defined and equitable. Always opt for “Weighted Average Anti Dilution Rights” (if possible).
4. Restrictive Board Control: Your vision should stay intact even after VC investment.
Term sheets that grant VCs excessive board control might hinder your ability to make strategic decisions down the line.
Strive for a balanced board structure that aligns with your growth plans.
5. Excessive Protective Provisions: While investor protection is important, be cautious of term sheets laden with restrictive protective provisions that could stifle your agility in navigating the business landscape.
Ensure these provisions are reasonable and in line with industry standards.
Remember, a VC partnership should be a win-win. Don’t shy away from seeking legal counsel to decipher the intricacies of a term sheet.
Your startup’s journey is unique, and securing funding should enhance, not hinder, your path to success.
#StartupWisdom #TermSheetInsights #FounderAdvice #wowsglobal
