10 Clauses That Can Cost You Your Company

Hi ,

Following last week’s breakdown of SAFEs, Convertible Notes, and Priced Rounds, a bunch of founders reached out asking:

“Can you demystify a few more of the terms investors keep throwing around?”

You got it.

Whether you're deep in the fundraising weeds or just getting started, knowing your way around the language of capital raising can save you time, confusion, and (sometimes) equity.

Here’s a glossary of 10 clauses worth knowing.

In the wrong hands these can really sting. So read on, and stay sharp.

1. Full Ratchet Anti-Dilution

This clause protects investors if you raise a future round at a lower price than they paid. But not in a gentle way.

A full ratchet resets the price of their original investment to match the lower valuation of the down round — giving them more shares for the same money and pushing the dilution squarely onto the founders.

For example: If an investor paid $1.00 per share, and a future round is priced at $0.50 per share, their ownership gets recalculated as if they paid $0.50 all along — effectively doubling their shares.

✅ A fairer alternative: weighted average anti-dilution, which spreads the impact more evenly.

2. Participating Preference (with No Cap)

This clause lets investors take back their initial investment before anyone else, then also participate in the rest of the proceeds — double-dipping, in effect.

Let’s say your company exits for $30M. The investor initially put in $5M and holds 25% equity. With this clause, they first reclaim their $5M, then also receive 25% of the remaining $25M — totalling $11.25M.

Even in good exits, founders can be left with far less than expected.

✅ If this clause appears, negotiate for a cap.

3. Multiple Liquidation Preferences

This clause gives investors a multiple return before others see anything — typically 2x or 3x.

Say they invested $10M with a 3x preference. If you sell for $25M, they’re contractually entitled to $30M.

That’s more than the entire sale value.

You and your team? Zero.

💡 Stick to 1x. Anything more should be tied to exceptional performance.

4. Super Pro-Rata Rights

Gives investors the right to buy more than their share in future rounds. That can box out new investors, concentrate control, and reduce founder leverage.

Example: A VC owns 10% at seed, but super pro-rata rights allow them to take up to 30% at Series A — crowding others out.

🚩 These rights can be useful in limited cases but watch the percentage and make sure it aligns with your long-term plans.

5. Founder Vesting Reset

Some term sheets propose a reset of founder vesting — meaning you start your equity vesting from scratch, even if you've already spent years building the company.

You raise capital, then suddenly own 0% of your company on paper, needing to re-earn it over the next four years.

🎯 Partial resets, acceleration clauses, or bespoke vesting plans can help balance founder commitment with investor confidence.

6. Redemption Rights

This clause allows investors to demand the company repurchase their shares after a fixed time — often 3 to 5 years.

It turns equity into a de facto loan with a due date. If you haven’t exited or raised again by then, it can create huge pressure.

📉 Worst case? It forces a rushed sale, down round, or insolvency. At minimum, it limits your strategic runway.

7. Full Board Control

Some investors ask for the right to appoint the majority of your board. That’s a direct route to decision-making power — and potentially your exit as CEO.

Even with minority ownership, they can override your vision, block strategic decisions, or replace the founding team.

🧭 Aim for a balanced board: typically one investor seat, one founder seat, and one independent.

8. Excessive Drag-Along Rights

Drag-along rights let majority shareholders force others to sell in an exit. They’re standard — but the thresholds matter.

If the clause allows 30% or 40% ownership to trigger a drag, you could be forced to sell to a buyer you don’t believe in, at a price you don’t like.

💬 Best practice is 50%+ of shareholders and board approval.

9. Extensive Protective Provisions

These clauses allow investors to veto certain business decisions. Some controls are normal — issuing new shares, selling the company, changing the constitution.

But if they stretch to hiring decisions, product strategy, or everyday operations, you’re no longer running your company — you’re asking permission.

⚠️ Protect your autonomy. Limit these clauses to genuinely material events.

10. Milestone-Based Tranches

This clause says the investor's money will be released in stages, tied to you hitting specific milestones.

Sounds reasonable — until you fall just short of a revenue or product goal, and the rest of the capital never arrives.

📉 Forecasting is hard enough. Don’t sign up for cliff-edge funding unless you’re 100% confident you can deliver — and have buffers in place.

BONUS: That Clause in the YC SAFE Template

Even the popular YC post-money SAFE includes a clause that guarantees each investor a fixed ownership percentage, protected from dilution in future convertible rounds.

Why it matters:
Every SAFE you raise dilutes you, not them. Stack a few, and you could give away 40–50% of your company before even reaching a priced round — without realising it.

✅ Better alternative: Consider pre-money SAFEs or modified templates that spread dilution more evenly.

Final Thought

It’s easy to get swept up in the “we got the money!” moment.

But terms matter — often more than valuation.

You don’t need to memorise every clause.
But you do need to:

• Understand the ones that quietly shift control

• Ask questions

• Get good legal advice (ideally from someone who’s seen both sides)

• Trust your instincts — if something feels off, it probably is

Investors aren’t the enemy. They’re doing their job.

So should you.

Here’s to raising capital on your terms.

Amy and the Team @ Raaise

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