With down rounds looming, startup founders have a lot less dealmaking leverage than they did in 2021. If new to the fundraising game, the changing market will require an accelerated class on less-favorable term sheet provisions like liquidation preferences. The information may have been forgotten during the last cycle, but at least it’s available, which is less the case for university spinouts and M&As. Let’s dive in. — Anna
Investor protections are back
When it comes to startup fundraising, there’s a lot more open discussion these days around deal terms than there was 10 years ago. But with founders only getting a few coin tosses in their lives, compared to the multiple deals that VCs and lawyers get to see, it is as important as ever for entrepreneurs to understand what they are signing onto.
“Deal terms look different in a downturn,” my colleague Rebecca Szkutak wrote. The lawyers she talked to predicted that certain clauses meant to protect investors are going to make a return — which also echoes what we are hearing through the grapevine. Among the provisions to watch out for are liquidation preferences, pay-to-play, and antidilution protections, including the dreaded full ratchet.