Term Sheet Questions Expose Predatory Traps

Term Sheet Negotiation Questions (Reverse DD)

last updated: Feb 9, 2026
Investors review hundreds of term sheets a year. You might see one or two in a lifetime. This asymmetry often leads to “standard” terms that quietly siphon millions from founders before they even hire their first engineer. The goal of this guide is to arm you with specific questions — Reverse Due Diligence — that expose whether a term sheet is a partnership offer or a predatory trap.

TL;DR

Term Sheet Negotiation Questions are not about being difficult; they are about revealing whether your investor is a partner or a predator. Most “standard” terms are negotiable if you understand the underlying math of dilution and control.

Key Benchmarks:
  • Dilution: Median Seed dilution is approximately 20.1% (down from ~23%). Anything approaching 30% is a red flag.
  • Preference: 1x Non-Participating Preference is the only acceptable standard. If they ask for ‘Participating,’ they are double-dipping.
  • Trap: Watch out for the “Pre-Money Shuffle” — investors forcing you to create a large option pool before their investment, effectively making you pay for 100% of future hires.

How to read this: Copy the questions in the ‘How to Negotiate’ section directly into your negotiation notes.

Glossary

  • Liquidation Preference: The order in which people get paid when you sell. “1x Non-Participating” means they get their money back or their share of the upside, not both.
  • Pre-Money Shuffle: A tactic where the option pool is calculated on the pre-money valuation. This dilutes only the founders. A post-money pool calculation dilutes everyone equally (rare but fair).
  • Protective Provisions: Veto rights investors hold over operational decisions (e.g., selling the company, raising debt, changing the business model).
  • Drag-Along Rights: A clause that forces minority shareholders (you) to sell the company if a majority (investors) votes to sell.

How to Negotiate: The 20 Questions You Need

Copy these 20 questions into your negotiation prep doc. Do not ask them all at once; weave them into your calls with the Partner or General Counsel. If you need reference points, review our B2B Term Sheet Examples.

Category 1: Economics (The “Who Gets Paid” Questions)
  1. Option Pool Sizing: “Is the option pool calculated on the pre-money or post-money valuation?” (Note: Pre-money is standard, but use this to negotiate the size down from 20% to ~10–12% based on a hiring plan.)
  2. Liquidation Preference: “Can you confirm this is a standard 1x non-participating preference? We do not sign participating preferred terms.”
  3. Dividends: “Are the dividends cumulative or non-cumulative?” (Target: Non-cumulative. Cumulative dividends compound like debt.)
  4. Anti-Dilution: “Is the anti-dilution protection Broad-Based Weighted Average?” (Full ratchet is a deal-breaker.)
  5. Pay-to-Play: “Are there pay-to-play provisions that force us to participate in future rounds to keep our preferred status?”
  6. Fees: “Is the company expected to pay your legal counsel fees? Is there a cap?” (Standard cap: $30k–$50k.)
  7. Pro-Rata Rights: “Do major investors get pro-rata rights in future rounds? What is the threshold to qualify as a 'Major Investor'?”

Category 2: Control (The “Who Firing Whom” Questions)
  1. Board Composition: “What is the proposed board structure? 2 Common (Founders) + 1 Preferred (Investor)?” (Avoid losing board control at Seed.)
  2. Independent Board Member: “If we add an independent seat, do we (Common) retain the right to appoint, or is it a mutual consent vote?”
  3. Protective Provisions Threshold: “What percentage of preferred stock is required to block operational decisions? Simple majority (50%+) or super-majority (67%+)?”
  4. Budget Approval: “Do you require Board approval for the annual budget? What happens if we disagree on burn rate?”
  5. Founder Vesting: “Are you resetting our vesting clocks? We expect credit for time served.” (Do not let them restart your 4-year clock at zero.)
  6. CEO Removal: “Does the Board have the right to remove a Founder-CEO without 'Cause'? How is 'Cause' defined?”

Category 3: Exits & Liquidity (The “End Game” Questions)
  1. Drag-Along Threshold: “What percentage of the shareholder vote is required to trigger drag-along rights? Is it just the investors, or investors + founders?”
  2. Registration Rights: “When do demand registration rights kick in? Is it after 5 years or upon IPO?”
  3. Redemption Rights: “Does this term sheet include redemption rights (the right to ask for money back after X years)?” (Ideally: No.)
  4. Acquisition Veto: “Can a single investor block an acquisition offer that the founders and majority of shareholders want to take?”
  5. Secondary Sales: “Do you have Right of First Refusal (ROFR) on founder secondary sales? Does the company have a secondary policy?”
  6. IPO Lock-up: “Is the market standoff period standard (180 days)?”
  7. Exclusivity/No-Shop: “How long is the exclusivity period? We prefer 30 days maximum.” (Don't get locked up for 60+ days while they drag their feet.)

Benchmarks

Before negotiating, you must know what “normal” looks like in the current market. Deviations from these ranges are negotiation points.

  • Seed Dilution: 20–25% is standard. According to Carta’s dilution data, the median seed dilution is sitting at approximately 20.1%.
  • Option Pool Size: 10–15% is healthy. Investors will ask for 20%. You should push back with a hiring plan that justifies a smaller pool.
  • Legal Fees: Capped at $30,000–$50,000 for the lead investor’s counsel. If they ask for uncapped fees, they have no incentive to close quickly.

Comparison: Participating vs. Non-Participating

This single clause can change your exit outcome by millions. Do not gloss over it.

The Good: 1x Non-Participating Preferred
This is the industry standard. It gives the investor a choice: take their original investment back (downside protection) OR convert to common stock and share the proceeds according to ownership % (upside participation). They cannot do both.

The Bad: Participating Preferred
This is “double dipping.” The investor gets their money back first AND then participates in the remaining proceeds as if they hadn't been paid back. In a modest exit, this structure can leave founders with significantly reduced returns. Never sign this at the Seed stage.

Risks: The Pre-Money Shuffle

The most common “gotcha” in term sheets is the Option Pool Shuffle. Investors often insist on a 20% option pool calculated on the pre-money valuation. This sounds technical, but it is financially brutal.

Sample Math: The Cost of a 20% Pool
Let's assume a $2M investment on an $8M Pre-Money valuation ($10M Post-Money).
  • Scenario A (20% Pool from Pre-Money): The investor wants a 20% pool ($2M value) carved out of your equity. Your effective pre-money valuation drops from $8M to $6M. You own 60% of the company.
  • Scenario B (10% Pool from Pre-Money): You negotiate the pool down to 10% ($1M value) based on a concrete hiring plan. Your effective pre-money valuation is $7M. You own 70% of the company.

Impact: Negotiating the pool from 20% to 10% saved you 10% of the company. On a $100M exit, that is a $10M difference. See this breakdown of the shuffle for a deeper dive.

Conclusion: Will a Perfect Term Sheet Get You to $10k MRR?

A clean term sheet prevents you from losing your company, but it doesn't generate revenue. Use these questions to block toxic terms like Participating Preferred, then sign and get back to building. Your real leverage isn't legal arguments — it's hitting Design Partner Agreements that convert to $10k+ MRR.
Take the 90-second audit to calculate your probability of hitting $10k MRR in the next 90 days.
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FAQ
  • You:
    Can I really ask these questions to a VC without looking difficult?
    Guide:
    Yes. Serious investors respect founders who understand the mechanics of their business. If an investor pulls a deal because you asked about Liquidation Preferences, you dodged a bullet. Check our Term Sheet vs SAFE guide to see if you even need a priced round yet.
  • You:
    What is the “market standard” for Founder Vesting?
    Guide:
    Standard is 4 years with a 1-year cliff. However, if you have been working on the startup for 2 years already, you should ask for “credit for time served” so you don't start from day zero.
  • You:
    Should I use a lawyer for a Seed round term sheet?
    Guide:
    Absolutely. Never sign a term sheet without a lawyer who specializes in venture financing (not your family real estate lawyer). The fees ($10k–$30k) are worth avoiding a bad ‘Participating Preferred’ clause.
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