Scary Startup Deal Terms Are Back in Term Sheets

The real Halloween fright for founders? Scary deal terms in a term sheet.

For the past few quarters, more and more term sheets were accepted that came along with investor-friendly clauses. These included high liquidation preferences, participating preferred shares, and cumulative dividends.

You can see in the chart below the rise of each difficult clause from the outlined bars in 2021 and 2022 to the orange bars of early 2023.

But in Q3, the story changed.

Venture capitalists basically stopped insisting on >1x liquidation preferences (only showed up in a minuscule 1.6% of rounds). They also reduced the rate of participation and halved the appearance of cumulative dividends.

So what gives?

Sadly, it's likely something scarier than onerous deal terms - VCs just stopped doing these deals at all.

All of these clauses within a venture deal favor the investor in any eventual exit scenario over the founder and employees. The fact that they are declining in frequency may be a negative sign for the ecosystem at large—investors don't see any path forward for some companies, no matter how favorable the contract is for them.

Of course founders should still study up on these terms and more: things like ROFR, pro rata, warrants, etc etc, get a good lawyer for sure.

But this is a moment where term sheets with fangs may be less frightening than no term sheets at all.

Stay calm and follow the data! Full Q3 numbers from Carta out shortly.

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