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With downturns looming, startup founders have much less leverage over deal making than they did in 2021. Being new to the fundraising game, the changing market will require an accelerated lesson on less favorable term terms such as liquidation preferences. The information may have been forgotten during the last cycle, but at least it is available, which is less the case for university spinouts and M&A. Let’s dive in. Anna
Investor protection is back
When it comes to fundraising for startups, there is much more open discussion about deal terms today than there was 10 years ago. But with founders only getting a few coins in their lives, compared to the multiple deals VCs and lawyers see, it’s as important as ever for entrepreneurs to understand what they’re signing up for.
“Deal terms look different in a recession”, my colleague Rebecca Szkutak wrote. The lawyers she spoke to predicted that certain clauses designed to protect investors will yield returns — which also reflects what we’re hearing through the vine† Among the amenities to look out for are liquidation preferences, pay-to-play and dilution protection, including the dreaded full ratchet.