When to Walk Away from a “Good” Term Sheet

A term sheet that looks good on paper—high valuation, clean economics, reasonable board—can still be a trap. The decision to accept or walk away is rarely about whether a sheet is objectively attractive. It is about whether the structure preserves long-term optionality and alignment.

Most founders walk too late, after emotional and procedural investment in the process. The right moment is earlier—before exclusivity—when leverage still exists.

When should a founder walk away from a term sheet?

A founder should walk away when a term sheet sacrifices long-term control or upside in exchange for valuation, especially before exclusivity removes leverage.

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Red Lines: Structural Signals to Walk Away

1. Participating Preferences Without a Cap

In any realistic exit below 3–4× invested capital, uncapped participating preferences transfer disproportionate value to preferred holders. If an investor resists any reasonable cap on participation, the economics increasingly assume only unicorn-level outcomes will reward founders. At that point, alignment is fragile at best.

2. Investor Board Majority Paired with Broad Protective Provisions

An investor-controlled board combined with veto rights over financing, budgets, or senior hiring creates a governance cage. Founders may retain meaningful ownership while losing practical authority over the company’s trajectory. When control and economics tilt this heavily in the same direction, the structure deserves serious reconsideration.

3. Full-Ratchet Anti-Dilution

Full-ratchet protection resets prior pricing aggressively in down rounds, disproportionately penalizing founders and early holders. Broad-based weighted average protection has become market standard. Stronger formulations typically signal a tolerance for future value transfer that compounds rather than stabilizes.

4. Oversized Pre-Money Option Pools (>15–18%)

Large option pools created fully pre-money can quietly transfer substantial founder value before pricing even begins. When pool sizing pushes toward the high teens or beyond without partial inclusion in the pre-money valuation, the economic cost is often material enough to outweigh headline price.

5. No Acceleration on Founder Vesting

Founder acceleration—single or double trigger—exists to protect against forced departure in a sale or change of control. In competitive processes, a refusal to include any acceleration can indicate misalignment around exit scenarios and leadership continuity.

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Warning Signals: High Risk, Proceed with Caution

1. Stacked Seniority or Aggressive Pay-to-Play

Structures where later series are paid first, or where non-participating investors lose preferences in down rounds, complicate future raises and signal a higher tolerance for distress scenarios. These terms may be survivable, but typically require meaningful compensation elsewhere.

2. Exclusivity Without Material Upside

Exclusivity eliminates competing leverage immediately. If the proposed economics or structure are only marginally better than available alternatives, signing exclusivity shifts risk without corresponding benefit.

3. Refusal to Model Exit Waterfalls

When a lead investor resists modeling or discussing exit outcomes, it often reflects unacknowledged asymmetry rather than simplicity. Structural clarity should improve, not weaken, confidence.

4. Multiple Observers or a Shadow Board

Multiple observer seats can create informal control without formal accountability. When observer rights accumulate without clear limits, governance influence may already be shifting off-balance.

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Decision Framework

Before proceeding, ask these questions in order:

1. Does this structure preserve meaningful upside in $50M–$200M exits? (Model it.)
2. Does it allow retention—or recovery—of control at key inflection points?
3. Does it establish precedents that remain defensible in Series B and beyond?
4. Do I have sufficient runway to walk away and run another process?

If any answer is no, the sheet may look good—but it is not good enough.

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Timing and Leverage

The most effective moment to walk is before exclusivity or after the first round of redlines, when the investor’s non-negotiables become clear.

Walking late—after weeks of back-and-forth or under time pressure—signals constraint. Walking early, with alternatives in play, preserves both reputation and optionality.

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Practitioner Reality

The “good” term sheet is the one that survives misalignment.

Many founders accept structures that feel attractive in the moment and regret them in the next round or at exit. A lower valuation paired with clean economics and retained control often outperforms a higher valuation burdened by structural asymmetry.

The best deals are the ones you can afford to walk away from.

 

This closes Series 3 — Negotiation from the Founder’s Seat.

The natural continuation is Series 4 — Convertible Notes & SAFEs (The Truth), where these structures determine the terms and conditions of notes and SAFEs, discount and valuation cap, conversion, and more.