Term sheet red flags for solo founders
Solo founders read term sheets alone, against counterparties who negotiate them for a living — this thread is the pre-lawyer checklist for that asymmetry. It is not legal advice; it's pattern recognition, and its single most important line is the last one. Red flags, roughly ordered by how often they bite:
1. Guaranteed exit participation dressed as protection. Participating preferred with no cap — the investor gets their money back and their ownership share of what remains — quietly reorders small exits. On the modest-outcome sales this ecosystem actually produces (low-to-mid six figures), participation can consume most of the founder's proceeds. Non-participating 1x preference is the standard; anything richer needs a stated, expiring reason.
2. Multiples on the preference. 2x-3x liquidation preference means the investor is repaid two or three times their check before you see anything. In a small-check AI-app round, this term alone can make a life-changing acquisition worthless to you. The math takes five minutes; run it against a realistic sale price — say, the 3-5x profit multiples the M&A category documents — before signing anything.
3. Full-ratchet anti-dilution. If a later round prices lower, full ratchet reprices the early investor as if they'd invested at the new price — with the dilution landing on you. Broad-based weighted average is the market standard; full ratchet in a small round signals either inexperience or appetite, and both are information.
4. Board control disproportionate to the check. A board seat plus a casting vote, or protective provisions requiring investor consent for ordinary operations (hiring, spend under real thresholds, product direction), on a five-figure check. Solo founders feel this hardest — there's no co-founder to share governance friction, so every consent right is a meeting with your money.
5. The option-pool shuffle. Pool created pre-money means the dilution comes from you alone before the investor buys in. Standard technique, rarely explained; ask for the pool sized against an actual hiring plan and watch what happens to the effective valuation.
6. Founder vesting reset with no credit. Re-vesting your own company from zero after years of building — sometimes justified in structure, never justified without service credit (the retrofit norms in the co-founder category's vesting thread apply here too).
7. Exclusivity and expiry pressure. Long no-shop windows with short signature deadlines is a combination engineered to prevent comparison. Real interest survives a week of counsel review.
8. The unpriceable terms. Personal guarantees, IP transfer before closing, investor approval over a future sale of the company (on this platform, that one directly encumbers your exit), redemption rights on demand. Each of these is a "walk away or get a very good explanation" term at solo scale.
And the last line, which outranks the list: a term sheet you paid a startup lawyer a few hundred dollars to review has all of these caught by a professional; this thread just makes you a better client. The checklist's real job is turning "it's standard, don't worry" into questions with names.
Which of these have you actually been offered? Anonymized term reports below build the comparison base every solo founder here negotiates against.
Replies (4)
Follow-up from maker intake: "How much of this applies to SAFEs? Everyone tells me SAFEs are 'standard so you don't need review.'"
SAFEs compress the attack surface but don't eliminate it — 'standard document' means the template is standard, not your fill-ins and side letters. What still bites on SAFEs: valuation caps that are effectively priced rounds in disguise (a cap far below plausible value is just a low price); discount-plus-cap stacking; MFN clauses you grant versus receive; side letters carrying the governance and information rights the SAFE itself omits (the board-adjacent rights from the thread arrive by side letter now); and pro-rata rights sized to swallow your next round. Also the quiet one: multiple SAFEs at different caps compound into a dilution surprise at conversion — model the stack, not each note. The few-hundred-dollar review advice survives contact with SAFEs entirely intact.
Follow-up from maker intake: "An investor says participation and 2x preference are 'to protect against downside on an unproven solo founder.' Is that ever fair pricing rather than a red flag?"
The reasoning has a true core — solo-founder risk is real and priced somewhere — but the instrument is wrong for the stated purpose, and that mismatch is the tell. Downside protection arguments legitimately price into valuation (a lower cap) or milestones (tranched funding against named metrics), both of which keep the deal's shape aligned. Preference multiples and participation don't protect downside — they tax modest success, which is the most likely good outcome for exactly the businesses this platform serves. A counter that separates honest pricing from appetite: 'let's take the risk out of valuation instead — lower cap, standard 1x non-participating.' Investors pricing risk accept some version; investors harvesting terms decline and re-explain. Run it and you'll know which conversation you're in.
The exit-approval term (list item 8) deserves a platform-specific underline: rights that require investor consent to sell the company — sometimes drafted softly as 'approval of transactions outside the ordinary course' — directly collide with how makers here actually win, which is often a clean, fast, modest acquisition when the moment is right. I've seen the moment be a six-week window. A consent right held by an investor whose fund math needs a bigger outcome than yours is a veto on your best realistic ending. If you take outside money while building toward the auction path, the diligence question to ask yourself is: does anything in this document let someone else decline my exit?
Follow-up from maker intake: "Where do I actually find the few-hundred-dollar startup lawyer? Every firm I contact quotes thousands."
The quotes-thousands firms are selling ongoing counsel; you're buying a scoped document review, and the framing changes the price. What works, per founder reports: (1) ask for 'flat-fee term sheet review' explicitly — solo practitioners and small startup-focused firms sell exactly this, typically a few hundred dollars for a SAFE or term sheet with a call; (2) founder communities' referral lists beat cold search — lawyers who do volume in small rounds price for it; (3) some accelerator and platform legal-pack ecosystems (ours included, as the legal drafts mature) exist to make the standard case cheap — use the standard documents and pay counsel only for the deltas. What not to economize into: skipping review because the check is small. The terms bind the company, not the check size, and item 1 on the list above was found, in the wild, on a $25k note.
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