The Founder Guide to negotiating Venture Deals
The full early stage terms negotiation guide for founders. Do's and don'ts when negotiating preseed, seed and series A terms.
Did you know that FanDuel, the daily fantasy sports company,
raised over $400 million in funding,
generated more than $100 million in annual revenue at one point,
soared to a $1.2 billion valuation, and eventually
sold for around $558 million
and yet its founders ended up with nothing?
Well, today I’m not going to go throught the whole story, but it got me thinking it would be great to share with you what you can agree and what you shouldn’t agree as a founder raising venture capital.
Still a free subscriber? Upgrading to a premium subscription will give you access not only to this invaluable post but also to the entire archive of articles published on Product Market Fit like💰The Angel Investor List, The Investment Memo List and much more!
Do's and don'ts when negotiating preseed, seed and series A terms
So, let’s start with:
Do’s:
Use Simple Funding Instruments:
Employ SAFEs or convertible notes that follow market-standard templates.
If using a convertible note, ensure a fair valuation cap and a reasonable discount (e.g., 15–25%) to reward early investors without creating overly aggressive future expectations.
Minimize Structural Complexity:
Avoid formal board seats or investor veto rights at this stage.
Keep governance straightforward: founders should retain all decision-making power so you can pivot quickly and iterate on your product.
Secure Friendly Early Investors:
Seek out angels or micro-funds that focus on founder-friendly terms and are known for light documentation.
Their involvement should be about mentorship, introductions, and domain insight, not imposing heavy-handed rights or preferences.
Don’ts:
Don’t Over-Dilute Early:
It’s very important of maintaining founder ownership. Giving away more than 10–20% at pre-seed is often unnecessary and sets a bad precedent for future rounds.
Don’t Accept Complex Economic Rights:
No liquidation preferences or anti-dilution provisions should appear here. Keep your cap table lean and investor returns straightforward at this stage.
Don’t Grant Control or Oversight Rights:
Avoid any form of protective provisions that allow investors to block basic corporate actions. It’s too early to grant these rights and they can scare off future investors looking for a clean slate.
Dos:
Negotiate a Balanced Valuation and Terms:
If raising a priced round, keep the pre-money valuation realistic. A $5–10M pre-money range is common for a solid seed company, but vary based on geography and sector.
A modest valuation combined with standard terms (like a simple 1x non-participating liquidation preference) is often better than a sky-high valuation packed with aggressive clauses.
Secure Broad-Based Weighted Average Anti-Dilution (If Required):
Venture Deals stresses that if investors insist on anti-dilution protection, ensure it’s broad-based weighted average, not full-ratchet. Broad-based weighted average spreads downside risk fairly and doesn’t crush founder equity in a future down round.
Limit Protective Provisions to Major Decisions Only:
Agree only to investor vetoes on major liquidity events (selling the company, issuing a new class of shares) or radical changes in business.
Routine operational decisions (hiring below a certain comp level, day-to-day vendor choices) should remain under founder control.
Maintain a Founder-Centric Board Structure:
If a formal board is formed, a common setup is two founders, one investor seat, and potentially one independent director.
Keep control balanced—investors shouldn’t be able to outvote the founders on critical matters at this stage.
Don’ts:
Don’t Accept Multiple or Participating Preferences:
Push back against 2x liquidation preferences or participating preferred stock.
Venture Deals points out that participating preferred lets investors “double dip” by taking their principal back first and then sharing in the upside, which disproportionately harms founders.
Don’t Over-Optimize for Valuation at the Expense of Terms:
A slightly lower valuation with standard 1x non-participating preference, sane anti-dilution, and limited protective provisions is preferable to a flashy headline valuation loaded with investor-friendly traps.
Don’t Ignore the Need for Experienced Counsel:
By seed stage, it’s crucial to have a startup-focused attorney who knows market norms.
Don’t rely on generalists unfamiliar with venture norms. The book consistently emphasizes that knowledgeable legal counsel pays dividends in negotiating balanced terms.
Dos:
Insist on a Standard 1x Non-Participating Liquidation Preference:
Make this the industry-standard baseline.
Avoid anything above 1x, and don’t allow participating terms without a cap if you can’t eliminate them entirely.
Confirm Board Composition and Neutralize Control Issues:
Typically, a 5-person board: 2 founders, 2 investor directors, and 1 mutually agreed-upon independent director.
This setup balances governance and prevents investors from unilateral control. Venture Deals highlights that a well-structured board can mitigate future conflicts.
Set Clear, Broad-Based Weighted Average Anti-Dilution Provisions:
If a future down round happens, ensure you won’t be unduly punished.
Confirm all relevant formulas and, if possible, avoid full-ratchet clauses at this stage.
Test Terms Against Multiple Exit Scenarios:
Model outcomes at different exit values ($50M, $100M, $300M+) to understand how preferences and anti-dilution affect your founder stake.
Venture Deals encourages this scenario planning to prevent nasty surprises at exit.
Don’ts:
Don’t Allow Investor Veto Rights on Routine Operations:
Restrict their protective provisions to major structural changes: mergers, acquisitions, or issuing a new class of shares.
Don’t allow “death by a thousand cuts”—where investors can micromanage strategy or hiring.
Don’t Tolerate Cumulative or Stacked Preferences From Previous Rounds:
Review and, if necessary, renegotiate earlier round terms that might stack preferences.
Avoid scenarios where multiple layers of investor returns leave founders with minimal upside in a moderate exit.
Don’t Blindly Accept Market-Standard Phrases Without Understanding:
Terms like “market standard” or “industry norm” can mask onerous clauses.
Always have counsel explain the practical implications, and be willing to push back if a so-called “standard” is not truly founder-friendly.
I hope this is valuable for you guys and remember, if you want a higher valuation, don’t forget to neg the VCs 😂