If you’re a startup founder in the middle of raising pre-seed, seed, or Series A funding, chances are you’ll be presented with a term sheet. It’s a crucial step, but it can also be a potential minefield.
This article is for founders who already understand the basics of term sheets, but want to go a level deeper. If you need more information on what a term sheet is, you can find out more in our term sheet guide.
We highlight the most common red flags that appear during the term sheet stage, from aggressive investor rights to unexpected dilution, and offers practical tips on how to spot and resolve them. Whether this is your first time negotiating with investors or your second or third round, it’s designed to help you approach the process with more clarity and confidence.
While some issues are easy to fix with the right conversations, others are harder to unwind once signed, which is why getting term sheet legal advice early is so important. A start-up-focused lawyer can help you understand what’s standard, flag clauses that could cause trouble later, and make sure you’re protecting your business as you grow.
Common term sheet pitfalls
Here are some of the most frequent issues we see founders encounter during the term sheet stage, and how to handle them with clarity and confidence. These examples are inspired by real-world scenarios we've seen advising early-stage start-ups.
Watch out for unfair loan terms
Some early-stage investments arrive in the form of advanced subscription agreements (ASAs), convertible loan notes (CLN) or simple agreements for future equity (SAFE). For more information, check out our in-depth article on what ASAs are or read our guide comparing SAFEs and CLNs.
While these can be quicker than equity rounds, they often include complex clauses founders don’t fully understand.
Red flags: High interest rates, short repayment windows, unclear conversion caps, or terms that could trigger conversion early, sometimes without a proper valuation event.
Real-life example: A founder accepted a convertible note with a 10% interest rate and no longstop date. When the funding round was delayed, the investor pushed for repayment, putting the startup in a cash crunch and forcing an early, discounted conversion.
What to do: Ensure you're clear on when the loan converts, how interest is applied, and what happens if your round is delayed or doesn’t happen. These documents can seem 'standard,' but they vary widely: always have a lawyer review them alongside your term sheet.
Pressure on your valuation
Founders often feel they’ve struck gold with a high pre-money valuation, but a large number can be misleading if the small print tips the deal back in the investor’s favour.
Red flags: A valuation that’s hard to defend, paired with multiple liquidation preferences or investor protections that make it hard for founders to benefit unless the company performs flawlessly.
Real-life example: A founder raised a seed round at a £10M valuation with a 2x participating liquidation preference. When the company later sold for £15M, the investors received their money and a share of the remaining exit proceeds, while the founder saw far less than expected.
What to do: Look at the overall structure, not just the valuation. Ask yourself: what would each party receive in a modest exit? Would your equity still be meaningful? Aim for a balanced deal that sets your company up for long-term success, not short-term headlines.
Giving away too much equity, too soon
Founders eager to close a deal sometimes agree to give away 25%-40% of the company in a first round, only to realise later they’ve left themselves with little room for future fundraising.
Red flags: Large equity chunks traded for relatively modest sums, or investors insisting on a significant portion of the company early on, especially when paired with large option pools created pre-money.
Real-life example: A solo founder gave away 35% equity in a £300K round, plus agreed to a 15% option pool, effectively leaving them with barely half the company post-deal. When it came time to raise Series A, the cap table looked too tight, and follow-on investors hesitated.
What to do: Forecast your future funding needs and plan your equity accordingly. You can ask a lawyer to help you build one to visualise ownership after multiple rounds. If you want to find out more about cap tables, read our article on how to use a cap table.
Restrictions on future fundraising
Some term sheets contain clauses that intentionally or not make it harder to raise further investment later on.
Red flags: Tight pre-emption rights (giving current investors too much say in future rounds), investor consent for new share issues, or 'pay-to-play' clauses that disadvantage you if things don’t go exactly as planned.
Real-life example: A founder accepted a clause that required unanimous investor consent to raise a follow-on round. When one investor became unresponsive, it nearly killed the deal and delayed their runway extension.
What to do: Ensure your term sheet leaves space for future rounds. You need flexibility to grow: don’t let early investors lock the gate behind them.
Loss of control at board level
It’s not unusual for investors to request a board seat, but if you’re not careful, you can lose strategic control of your business far too early.
Red flags: Board majority shifting to investors, or veto rights that require investor approval for operational decisions (like hiring, pricing, or spending).
Real-life example: A founder brought in an investor who requested two board seats 'for oversight.' Within six months, key decisions were being blocked, slowing product development and creating internal friction.
What to do: Push for balanced board composition, and clarify what decisions require board or investor approval. A founder-led board at the early stage is not just normal, it’s essential.
Investors who aren’t aligned with your vision
The term sheet may be acceptable, but the investor behind it might not be the right fit.
Red flags: Investors pushing for a fast exit, talking about control or ROI before understanding your product, or unwilling to invest in team-building or long-term growth.
Real-life example: A team building a mission-driven, climate-focused platform accepted funding from an investor primarily interested in short-term commercial plays. Tensions mounted quickly over priorities, eventually leading to a buyout negotiation just a year later.
What to do: Take your time. Ask investors about their portfolio, their typical involvement, and how they’ve supported other startups. A lawyer can help flag unusual demands or restrictive terms that suggest misalignment.
Not understanding pre-money vs post-money valuations
It sounds technical, but it makes a big difference to how much equity you’re giving away.
Red flags: Valuation figures that don’t clearly state whether they include the investment amount or not, especially when paired with option pool adjustments.
Real-life example: A founder thought they were raising at a £5M valuation, giving away 20% of the company. But the valuation was post-money, and the option pool came from their side, meaning they actually gave up closer to 30%.
What to do: Always clarify whether the valuation is pre- or post-money, and how the option pool is treated. If anything is unclear, push for explicit wording, or get a lawyer to check it.
Getting tied into ‘no-shop’ clauses
Many term sheets include exclusivity provisions that prevent you from speaking to other investors, but long or overly broad ones can limit your options.
Red flags: No-shop periods longer than 30–45 days, or automatic renewals if certain milestones aren’t met.
Real-life example: A founder signed a term sheet with a 60-day no-shop clause. When the investor went quiet during due diligence, they were blocked from pursuing other offers, eventually losing both deals.
What to do: Negotiate for a short, fixed exclusivity period (30 days is standard) and make sure it’s tied to good-faith progress. If things stall, you want to be able to move on quickly.
Don’t sign before you’re ready
Term sheets are often short, but their impact is long-lasting. What might look like a formality can contain clauses that affect your control, your cap table, and your ability to raise funds in the future. That’s why it’s so important not to rush, and not to go it alone.
Many of the red flags covered in this article can be spotted and resolved early with the right legal advice. A startup-focused lawyer will know what’s market, what’s risky, and how to negotiate terms that reflect both your vision and your growth plans. They’ll also help you avoid costly mistakes that only surface once the documents are final and the money’s in the bank.
If you're about to sign a term sheet, or expect to receive one soon, read our guide 'I've received a term sheet, what do I do next?'. We work with hundreds of UK startups at every stage of their journey. We can help you understand your options, negotiate on your behalf, and build investor relationships that support your long-term success.
Watch our free webinar for practical advice on how to prepare for your pre-seed or seed funding round and set yourself up for success. If you need legal support, simply fill out the short form below and a member of our team will be in touch.
