VC Terms
The Billion-Dollar Exit That Leaves Founders With Nothing: What’s Buried in Your Term Sheet?
Startup success isn’t just about revenue or valuation—it’s about the terms. Founders celebrating unicorn rounds today could be walking away with nothing tomorrow. Here’s why.
We’ve all seen the headlines:
“Startup acquired for $1.2B.”
“Unicorn exits after record-breaking raise.”
“Next-gen AI company bought by Big Tech.”
But what’s missing?
Sometimes, the founder walks away with $0.
Not because the company failed.
Not because the product didn’t work.
But because of what was quietly buried in the term sheet years before.
What Happens When Founders Don’t Control the Exit
This isn’t rare. I’ve seen it firsthand.
Startups raise at inflated valuations, often driven by hype or FOMO.
But those deals come with strings attached:
• 2x or 3x liquidation preferences
(Investors get 2–3 times their investment back before anyone else sees a dollar)
• Participating preferred stock
(VCs take their preference and their equity share — a double dip)
• Stacked seniority
(Later-round investors have more senior claims, squeezing out earlier ones)
• Board misalignment
(When your board controls the vote and you no longer control your company’s direction)
By the time the company exits, the liquidation waterfall looks like this:
1. Senior investors get paid out first (often in full, sometimes multiple times over)
2. Participating investors take their share again
3. Founders and early employees? Maybe a fraction—if anything at all
What to Watch For in Your Term Sheet
Founders are told to “just get the deal done” — but how it’s done matters more than you think.
Here’s what to look for (and push back on):
1. Liquidation Preferences
1x is standard. Anything higher is a red flag.
A 2x or 3x preference means investors get double or triple their money back first.
2. Participating Preferred Stock
• Non-participating preferred: investor chooses either their preference OR their equity.
• Participating preferred: they get both. Unless capped, this can destroy founder upside.
3. Seniority & Stacking
“Standard” practice is for each new round to be senior to the last.
Ask for pari passu clauses to flatten the stack and avoid cascading payouts.
4. Anti-Dilution Clauses
Full ratchet can be brutal. Weighted-average is far more founder-friendly.
5. Board Control
Who controls the board? Who controls the exit?
If investors can force a sale (and most term sheets give them this right), you may lose control of your company’s future.
Is There a Formula to Calculate Payout at Exit?
Yes — and every founder should know it.
It’s called the liquidation waterfall, and it’s modeled using:
• Your cap table (ownership % across investors, employees, founders)
• The terms per investor (liquidation preference, participation rights)
• The exit amount (acquisition value, secondary sale, etc.)
Example:
If your company exits for $100M and:
• Series C has a 2x preference on $30M
• Series B & A are participating preferred
• The board accelerates the exit…
You could easily walk away with less than $2M as a founder—despite a nine-figure headline.
The Real Lesson?
Raising capital isn’t the win.
Raising clean, founder-aligned capital is.
What founders actually need:
• 1x non-participating preferred terms (not more, not double-dipping)
• Balanced governance with board members aligned to long-term growth
• VCs who act like partners, not portfolio overlords
• Legal and financial advisors who know how to model outcomes—not just close deals
Note:
Top-tier firms like Sequoia Capital typically default to 1x non-participating preferred shares — protecting founders from excessive downside. Anything above this (especially with participation rights) is not founder-friendly.
Final Thought
If you’re a founder negotiating a term sheet:
• Don’t just focus on the raise.
• Model the outcome at exit.
• Protect the future you’re working so hard to build.
Negotiating “boring” terms today could mean the difference between a headline exit- and walking away empty-handed.
Want Help Navigating Your Term Sheet or Fundraise Strategy?
At The Scale Foundry, we help founders raise smarter, protect their cap table, and align their board with long-game strategy.
If you’re raising-or preparing to-let’s talk.
Work With Me at The Scale Foundry
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