Fundraising Soon? Term Sheet Clauses Investors Look For in 2025

Fundraising in 2025 looks very different from the frothy unicorn days. Today’s venture capital deals emphasize not just valuation but the fine print that governs who gets paid and who calls the shots. A term sheet lays out the basic rules of a deal it’s non‑binding but once signed it sets expectations for the final agreements. The headline valuation grabs attention, but investors scrutinize clauses that protect their stake and align incentives for the long haul. In fact, recent data show that 1× non‑participating liquidation preferences and protective governance rights have become almost universal. Founders must therefore unpack every term carefully. What looks like a great valuation can still hand investors far more upside if other terms aren’t fair.

 Imagine this: you just negotiated a “dream valuation” in your term sheet, only to discover that the investor’s share count and protective clauses leave you with a tiny piece of the exit pie. That scenario isn’t uncommon. In 2025, valuations alone don’t tell the whole story. Experienced founders and startups planning a raise should zoom in on each key clause. Investors will certainly want generous upside if your company does well, but they’ll also require downside protection if things go south. For example, Cooley LLP reports that in Q2 2025 about 98% of deals used a 1× liquidation preference (the investor gets back at least their money first) and 95% of deals were non‑participating (no double‑dipping). On the face of it that sounds founder friendly, but Cooley also notes that veto and protective rights which give investors blocking power over key decisions appeared in over 90% of rounds.

In short, the term sheet is a blueprint for control and value sharing. It dictates not just “who owns what” at signing, but “who gets paid first” if there’s an exit, and how the board will be governed. In 2025’s cautious market (a hangover from post 2022 down rounds and market uncertainty), investors expect strong protections. A recent report even calls today’s standard term sheets “anything but harmless fine print”: with 1× non‑participating preferences, veto rights and expanded option pools showing up in almost every round, founders who don’t understand term sheets are essentially negotiating blind. As one guide puts it, “The golden number on your term sheet might be valuation, but the real economics hide in the rest of the clauses”. In this blog we’ll break down the clauses you’re likely to see, explain what they mean, and highlight the latest trends so you can enter negotiations with eyes wide open.

Valuation and Option Pool

A term sheet will always start with a valuation but remember that headline valuation is only one lever. The effective deal value depends on stock distributions and reserves. A prime example is the employee stock option pool. Investors routinely insist on reserving a pool (often 10-20% of the post‑money shares) for future hires. At first glance that sounds fine is for attracting talent, after all. But in term sheet lingo the timing of that pool matters: most VCs want the pool pre‑money, meaning the pool shares dilute the founders, not the new investors.

For instance, suppose an investor offers $5M at a $20M pre‑money valuation with a 20% option of pool post‑money. On paper, it looks like the investor is buying 20% of the company. However, if the option of pool is increased before the money comes in, the founders actually give up more equity to the pool. The math is subtle but significant: adding a 5M‑share option pool pre‑money (the full 20% of the post‑money cap) can effectively drop the true pre‑money well below $20M. As one analysis warns, “even with the same headline valuation, changing pool size or timing can shift founder ownership by 5-10 percentage points”.

Negotiation tip: Always clarify how big the option pool is and whether it’s coming in pre‑ or post‑money. Don’t haggle on valuation in isolation the pool and any other share of issuances are part of the deal. Ideally, agree on the pool post‑money so that it’s a shared dilution (or negotiate a smaller pre‑money pool). At minimum, run the cap table numbers yourself. A good rule of thumb is, investors pay attention to ownership percentages much more than to whether the valuation looks round or big.

Liquidation Preferences: Who Gets Paid First

Think of a liquidation preference as the order of payment at an exit. If the company is sold or liquidated, investors with liquidation preferences get paid back their investment (typically “1×” the amount they put in) before common shareholders (usually founders and employees) see a dime. The key question is how and how much they get.

In 2025, the market standard is clear: 1× non‑participating preferred stock. “1× non‑participating” means investors simply get their money back once, and then any remaining exit proceeds are shared with the common shareholders (pro‑rata). It’s common sense: you respect the first losses, but you don’t let investors double dip on the upside. By mid‑2025, Cooley reports that about 98% of deals had a 1× liquidation preference, and 95% were non‑participating. That’s great news for founders, because it means the lucky investor doesn’t get paid twice in a medium or large exit.

Contrast that with participating preferred: under that (now rare) structure, an investor first takes back their 1× and then also participates as if they had common stock on whatever’s left. That “double dip” heavily favors VCs in outcomes. For example, if you sell for a moderate sum, participating preferred could easily pull tens of millions more in proceeds to investors, leaving much less for founders. There are even capped versions (e.g. 2× cap on participation), which are slightly less draconian but still skew returns. In practice, unless you’re in an extremely competitive late‑stage deal (or outside Silicon Valley markets that demand it), non‑participating is the norm. Anything else 1.5× preferences, hidden participation triggers, or especially uncapped participation is very much a red flag and should be justified by something unusual (e.g. real risk in the business model or market).

One example of how a liquidation preference matters: imagine an investor puts in $10M at 20% ownership, and later you sell the company for $50M. With 1× non‑participating preferred, the investor simply takes $10M (their 1× back) and the remaining $40M is split 80/20, so founders get $32M. With uncapped participating preferred, the investor would take $10M plus 20% of the remaining $40M ($8M) for a total of $18M, leaving founders only $32M the same as before, in this case. But if the exit were larger (say $150M), the investor’s share under participation would be $10M + 20% of $140M = $38M, versus only $30M to founders; whereas under non‑participating, the investor only ever gets $10M. In other words, participating sweetens small exits for investors but can drastically cut out founders in big exits. That’s why 1× NP is now the “clean downside protection” that most startups accept.

Anti-Dilution Protection

Investors hate seeing their ownership watered down in a down round, so term sheets always include antidilution clauses. There are two basic flavors:

• Full‑Ratchet- if the next round price is lower than your price, the investor’s conversion price resets all the way to that lower price, regardless of how much new money came in. It’s very harsh on founders and early employees, because it can wipe out huge value.

• Broad‑Based Weighted Average (BBWA)- the more common approach. It adjusts the conversion price downward based on a formula that considers how many shares were outstanding and how much was raised at the new price. The result is that dilution is shared more evenly, not absorbed entirely by founders and employees.

In practice, a broad-based weighted average is the market standard. Founders should always push for broad‑based weighted anti‑dilution, explicitly including all securities (including options, warrants and convertible notes) in the calculation. Anything narrower which would ignore option pools or other dilutive instruments effectively punishes the team more. Only in a severe down‑round (think: your Series A goes down 5× or more) might an investor ask for a full ratchet. Even then, you can trade for example, agree to a BBWA in exchange for something like a slightly higher liquidation cap or an extra board seat, instead of giving away full ratchet.

Beware of anti-dilution traps. A bad formula can leave a skeleton crew on the cap table. As one guide warns, “Cap table scars from poorly structured anti-dilution clauses can last longer than any product pivot”. The simple takeaway: weighted‑average, broad‑based protects the investor without crucifying the founders. It is, after all, intended to keep incentives aligned, not to make your down‑round impossible.

Pro Rata and Pre-Emptive Rights

Investors typically negotiate pro rata (pre‑emptive) rights. This means each existing investor has the right to buy its “ratable share” of the new round to maintain its ownership percentage. For them, it’s a protection and a bet on winners: if your startup hits it big, they don’t want to be diluted by later investors. For example, a lead VC taking 15% of a Series A will often want to maintain that stake in Series B, so they insist on pro rata rights in the term sheet. 

From the founder’s side, pro rata rights are generally fine for reasonable sized stakes. They ensure that your best investors stay engaged. Weeding out “super pro rata” requests is key: an investor shouldn’t get to buy extra beyond their full share to block new investors or take a huge chunk of the round. A safe approach is to grant standard pro rata to major investors (say, those owning over 5-10%), but cap it or require board approval if it’s enormous.

 In 2025, pro rata rights remain standard. One summary of market norms lists “Pro Rata Rights for Major Investors: maintains alignment without over‑clustering ownership” as a typical clause. Founders should note that these rights can become critical in later rounds. Carta data show that seed leads often target 10-15% ownership, and only by exercising pro rata in Series A/B can they sustain those positions. In other words, giving away too much in early rounds can force big pro rata allocations later, which might turn away new money. As a founder tip, strike a balance: accept fair pro rata for your leads, but preserve some “unallocated” equity so new strategic investors can join the cap table down the road.

 (Another point under this heading is Right of First Refusal (ROFR) or co-sale rights, which let your company or other shareholders buy stock if someone tries to sell to outsiders. These are usually boilerplate but be aware if big investors ask for too broad a ROFR/co-sale clause. We won’t dwell on it here, but in global markets like Europe or Israel, statutory pre‑emptive rights often kick in as well. For example, Germany mandates pre-emption by law, which is why German startups often do quick amendments to waive those rights in a VC round.)

Board Structure and Governance

Who sits on the board (and who doesn’t) is one of the most strategic clauses in a term sheet. The board steers the company through ups and downs, so investors pay close attention to board composition.

The typical pattern: Seed stage boards usually have 2 founders + 1 investor or 2 founders + 1 independents. By Series A/B, larger funds often join, shifting to something like 1 founder – 2 investors -1 independent, or 2 founders – 1 independent, depending on who leads the round. The exact numbers matter less than the swing vote. If there’s an independent or an odd number of seats, that independent effectively decides ties. Investors generally push for at least one board seat per lead investor, while founders try to keep at least one strong founder's presence.

Board seats carve up power. For example, going into 2025, a balanced board might read “2F-1I” (two founders, one investor) for seed; or “2F-2I-1” for Series A. As one investor guide notes, a healthy early board is 2 founders and 1 independent, then moving to 2 founders, 2 investors and 1 independent by A/B. Some investors (like corporate VCs or angels) might only take observer roles (no vote, just meeting access); others demand full director status and voting rights. 

Beware of giving up too much. Don’t lock in an investor as chairman or a permanent veto‑power board seat early on. You’ll want the flexibility to add experienced outsiders later. It’s common in 2025 for term sheets to include an independent director clause to break ties. However, that independent must be genuinely independent (no close consulting ties or other agendas), or your founders have essentially surrendered control.

 Protective Provisions and Veto Rights: Alongside board seats, investors will ask for a list of protective provisions of actions that require preferred shareholder approval. These are essentially investor veto rights on certain key decisions. Typical protective provisions include things like issuing new stock, changing the charter, taking on debt, changing executive compensation, or buying another company. If written broadly, these can paralyze a startup (imagine needing investors to sign off for every hire or product pivot!).

 In 2025, expect a carefully negotiated list. It’s normal for a term sheet to say: investors must approve things like selling the company, changing the board size, or taking on new rounds of financing. But try to push back on overly broad vetoes. For instance, a red flag is any clause giving investors a say in day‑to‑day operations (like hiring/firing executives or expanding into new markets). Veto rights should only cover major structural moves: “Shall we merge or sell?” or “Shall we issue millions of new shares?”

By mid‑2025, most term sheets still have many protective provisions over 90% of deals had at least some veto clauses. The nuance is that savvy founders limit the list. For example, you might insist that investor consent is only needed for (a) any new equity or debt financings, (b) M&A or IPO decisions, and (c) material charter changes. Anything smaller day to day budgets, hiring decisions belongs to the operating CEO.

Voting Rights and Other Clauses

Beyond preferences and board seats, term sheets spell out voting rights. Preferred shares almost always vote “one share, one vote” on an as converted basis. In practice, this means each preferred share equals one common share vote, so investors vote as a block. A critical clause is often a voting agreement: for example, founders and early investors may agree that preferred shareholders will vote together, or that certain actions require a special majority (say 66% of preferred votes). Watch out for any clause that gives preferred stock extra votes (besides any super‑voting rights for founder shares, which are usually separate).

One lesser‑seen clause is drag‑along rights. This says if a majority of shareholders agree to a sale, minority holders are “dragged along” and must sell on the same terms. Investors often require this to avoid holdouts later. Founders should be okay with a reasonable drag along but negotiate high approval thresholds (e.g. 70-75% of all voting shares), so you’re not forced into a fire sale by a small shareholder group.

Other housekeeping clauses: A no‑shop (or exclusivity) clause prevents you from courting other investors for a set time while you negotiate this round; that’s normal for lead investors. Information rights spell out what financial reports or board materials you must share; quarterly P&Ls and annual budgets are standard but avoid overly burdensome “deep dive” requests from minor investors.

ESOP, Dividends and Redemption

We’ve covered the main investor protections, but a few smaller clauses deserve mention:

1. Employee Stock Option Plan (ESOP): We talked about this under valuation. It’s worth re stating investors will insist the company maintain a generous option pool post‑financing to keep employees motivated. A typical pool size is 10-15% for a Series A (smaller at seed, larger at later stages). Negotiate whether that pool is carved out of the pre‑money (which means founders give up more) or the post‑money (which shares dilution with the round). A savvy founder tries to limit the pool to realistic hiring needs and possibly fund some of it with founders’ own equity if pressed. 

2. Dividends: These are rare in venture rounds (startups seldom pay dividends). Preferred stock often has a tiny non‑cumulative dividend (like 5-8%) as a “sweetener”, but it isn’t actually paid unless declared. Cumulative dividends (which accrue over years until exit) are almost off‑market now. Cooley reports cumulative dividends in only 2.5% of deals in early 2025, the lowest ever. If a term sheet does include a dividend, make sure it’s non‑cumulative (or minimal) or tied only to exit/ redemption events, and capped in total. Otherwise, you could owe a big hidden cost after several years. 

3. Redemption Rights: Rare startups for redemption rights (the investor can force the company to buy back shares after, say, 3-5 years). This is mainly for late-stage deals where the VC wants an out if there’s no IPO. Only about 4-6% of deals had redemption in recent quarters. If an investor asks for redemption, negotiate a long period (5+ years) and a low cap, or skip it altogether if possible.

4. Anti-competition and founder vesting: Many term sheets require any unvested founder stock to re‑vest on a 4‑year schedule with a 1‐year cliff from the date of the new investment. This ensures founders stay on board. In 2025, this is mostly standard. There may also be clauses restricting founders from competing or soliciting employees/clients if they leave. These are usually reasonable if time‑limited and geographic limited; just avoid overly broad non-competes that could prevent you from working in the same field ever again. 

5. Future Financing Terms: Some VCs try to include “most favored nation” or “anti-dilution” clauses beyond the typical ratchet for example, if you later give better terms to a new investor, they get the benefit. This is very founder unfriendly. In hot markets, we rarely see MFN clauses. In a down market, you should be especially cautious: you want the flexibility to give a new investor a special deal (for example, a slightly lower price) without triggering MFN payouts to all existing investors. Generally, founders should resist broad MFN or performance ratchets.

What’s New in 2025: Trends and Shifts

The fundraising climate after 2022 is less forgiving, and term sheets reflect that. Here are some key shifts since the venture boom:

1. Investor-friendly tilt: Following 2022’s market correction, many rounds have been flat or down, and investors have gained leverage. For example, pay-to-play provisions which force investors to put in their pro-rata share in each round or lose preferred status have surged. Cooley reports that by Q2 2025 roughly 10% of deals had pay‑to‑play clauses (the highest on record). These were almost unheard of in the prior boom years. In a tight raise or a down round, a lead may use pay-to play to compel insiders to fund the new round, or else get converted to common stock (losing their liquidation preference). As a founder, treat pay‑to‑play as a last resort if needed to save a round it aligns investors to your success but can also backfire if key VCs can’t participate.

2. Convertible notes and SAFEs: While this isn’t a term sheet of clause, note that many early deals still use convertible instruments (notes or SAFEs) which eventually convert into the term round. In 2025, founders should clear up any cap/discount terms early, so the term sheet is clean. Make sure any SAFE conversion is reflected in share counts for option pool and anti-dilution calculations. Investors will want those covered, but founders should understand exactly how previous SAFEs fold in.

3. Governance demands: Veto rights and board controls have increased. As noted, veto rights are in most deals now. Some investors have added clauses like requiring quarterly board meetings or limiting actions by written consent. Also, information rights have expanded: investors may insist on real‑time access to financials or KPIs. Founders should push back on overkill. A cadence of quarterly reports and monthly check-ins with the lead analyst is fair; daily data dumps to angels or small investors waste time and aren’t usually justified.

4. Greater focus on ESG/impact clauses: In some markets (especially Europe), VCs are adding clauses related to environmental, social, and governance metrics. These might require the company to follow certain reporting standards or hit DEI benchmarks. This is a new area in 2025 terms and varies by geography. As a founder, be ready to discuss your ESG strategy or at least negotiate reasonable terms (e.g. annual reporting, not onerous quarterly targets).

Overall, the trend is that founders must be more flexible on terms when capital is scarce. Valuation isn't king anymore; deal quality (i.e. founder friendly terms) is often the tiebreaker. A slightly lower price with clean terms may be better than a higher price with heavy strings attached. Indeed, one founders’ guide advises: “Don’t chase the highest valuation if the structure is ugly, structure costs more than dilution”.

Key Takeaways for Founders

Navigating term sheets is a skill every founder must sharpen. Below are some tips to keep in mind:

1. Negotiate from standards: Begin with market‑standard terms. 1× non‑participating liquidation preference, broad‑based weighted anti‑dilution, reasonable ESOP, and pro rata for lead investors are all totally normal requests. If an investor is asking for something heavy (like participating pref or full ratchet), immediately counter with something in alignment for example, “We’ll consider participation, but only with a cap, and I’d need an additional board seat and better reporting rights in return.” Trade‑off clauses rather than surrendering. 

2. Model the math: Always run the numbers. Show how each term affects ownership and payout. If a term sheet gives you a certain valuation, model how a 2× liquidation preference or an 18% option pool pre‑money would alter your take home in different exit scenarios. Often seeing the real cap table outcome calms fears and informs choices. Many founders realize too late that their “great valuation” could mean a small slice of the exit because of the fine print. 

3. Protect control: Limit vetoes to big‑ticket items: new debt beyond a certain amount, major acquisitions, founder stock sales, charter changes, and sale of the company. Anything less (like routine hiring or product pivots) should be in the board domain without needing an investor to sign‐off. Remember that term sheet veto rights carry forward into the stock purchase agreement, so be precise in the language.

4. Balance board seats: Aim for balance. Don’t give away control too early. A 2F-1I board is founder‑friendly at seed. If a lead wants two seats at Series A (making it 2F-2I), propose adding an independent to keep it an odd number and protect yourselves from stalemate. If an investor insists on being chaired or approving all board minutes, ask why and negotiate alternatives (like giving them observer status or special information rights instead). 

5. Think long term: Any term you sign stays with the company. A deal that feels friendly now can haunt you later if it scares your next lead. For example, a full ratchet anti-dilution scares Series B VCs more than an extra few percentages points on valuation. Focus on building a term sheet that the next fund can look at and nod “yes” without fear.

6. Get legal advice: Terms can be deceptively complex. A good startup attorney can catch wording that’s technically on the market but unfair in context. Early counsel can help you spot a masked clause (like “required consent” that has an undefined high threshold). While legal fees sting, consider it an investment: a slight tweak in a term can save millions of dollars in the end.

To summarize, key clauses to prioritize are liquidation preferences, anti-dilution, ESOP pool, board composition, pro rata, and voting rights. These determine the ultimate ownership, control, and payout more than the sticker price of any valuation. As one VC notes, terms like 1× non‑participating preference and weighted‑average anti‑dilution “keep alignment clean”. Armed with current market data and a clear understanding of each clause’s impact, founders can negotiate deals that attract capital and preserve value.

FAQs: Term Sheet Clauses & Fundraising in 2025

1. What is a term sheet for startup fundraising?

A term sheet is a non-binding document that outlines the key economic and governance in terms of an investment. It acts as a blueprint for the final legal agreements. While not legally binding, it sets expectations for both founders and investors.

2. Why are term sheets more investor-protective in 2025?

Post-2022 market corrections marked by lower valuations, tighter capital, and rising interest rates shifted negotiation power toward investors. As a result, investors now commonly include stronger protections like tighter liquidation preferences and stricter governance rights.

3. What is the valuation, and how is it set?

Valuation is the estimated worth of your company at the time of investment. It is influenced by revenue, growth rate, market potential, comparable company multiples, and investor sentiment. In 2025, valuations remain more conservative than in 2020–2021.

4. What is a liquidation preference?

A liquidation preference determines how investors get paid during a sale, merger, or shutdown.

 The most common standard is 1x non-participating, meaning investors get their investment back first, then the remaining proceeds are shared.

6. What is anti-dilution protection?

Anti-dilution clauses protect investors if the company raises a down round at a lower valuation.

 The most common method globally in 2025 is a broad-based weighted average, which is fairer to founders than older “full ratchet” provisions.

RELATED ARTICLES

1. Signing an International Contract? How to Choose Jurisdiction, Governing Law & Dispute Resolution – 2025 Guide.

2. Digital Signatures & Global Contract Validity in 2025: The Legal Guide for Businesses

3. OUTSOURCING SOFTWARE DEVELOPMENT ABROAD? LEGAL CLAUSES EVERY BUSINESS MUST KNOW (2025 GLOBAL GUIDE)

ABOUT THE AUTHOR

This blog is authored by Shridansh Tripathi, a second-year law student at the Department of Legal Studies and Research, Barkatullah University, Bhopal. 

REVIEWD BY:

Prakhar Rai, a seasoned corporate lawyer. He advises extensively on intellectual property, contracts, mergers and acquisitions, and private equity and venture capital. His work also includes data protection and privacy, regulatory and compliance advisory, white-collar crime, technology and startup law, and commercial dispute resolution.

https://www.linkedin.com/in/prakharai/

DISCLAIMER

The information provided in this article is for general educational purposes and does not constitute legal advice. Readers are encouraged to seek professional counsel before acting on any information herein. SolvLegal and the author disclaims any liability arising from reliance on this content.