Liquidation preference
A 1x non-participating liquidation preference means investors get their money back first, then remaining proceeds go to founders and employees pro-rata. Standard and founder-friendly. A 1x participating preference means investors get their money back AND participate pro-rata in remaining proceeds — effectively double-dipping. Participating preferences significantly reduce founder outcomes in mid-size exits ($50M–$200M range). A 2x preference means investors get 2x their investment before anyone else sees a cent.
Always model your exit outcomes at $20M, $50M, $100M and $200M under each preference structure before signing.
Anti-dilution provisions
Anti-dilution protects investors if you raise a future round at a lower valuation (down round). Full ratchet anti-dilution reprices the investor's shares to the new lower price — maximally punitive to founders. Broad-based weighted average anti-dilution is the standard and far more founder-friendly — it adjusts the conversion price based on a weighted average of old and new shares issued. Always push for broad-based weighted average; full ratchet is a red flag.
Pro-rata rights
Pro-rata rights give investors the right to maintain their ownership percentage in future rounds by investing additional capital. Standard pro-rata is common and reasonable — it lets your best investors double down. Super pro-rata (the right to increase ownership in future rounds) is aggressive and can create complications at Series A when new lead investors want to set the terms. Negotiate super pro-rata out if it appears.
Valuation ratchets and milestones
Some term sheets include valuation adjustments tied to milestones — if you hit $X ARR by Y date, the valuation is retroactively increased, reducing dilution. These can be founder-friendly when the milestones are realistic. They become traps when milestones are set at the edge of achievable, creating pressure to hit numbers at the expense of sustainable growth. Model the scenarios explicitly.