Every term sheet tells you something about the relationship you are about to enter. The headline numbers — valuation, round size, dilution — get the most attention, but they are rarely where the real power dynamics live. The clauses that determine who controls the company, who gets paid first on exit, and who can veto critical decisions are buried further down the document. Understanding whether those clauses lean founder-friendly or investor-friendly is the single most important skill a founder can develop before signing.
This article breaks down the key term sheet provisions that shift the balance of power between founders and investors, and explains what to look for in the Australian context.
The Two Categories That Matter
Term sheet provisions fall into two broad categories: economics (who gets what) and control (who decides what). A term sheet can be generous on valuation but punishing on control, or vice versa. Founders who focus exclusively on the pre-money number often miss the clauses that will actually shape their experience of running the company for the next five to ten years.
As Brad Feld and Jason Mendelson put it in Venture Deals, economics and control are the only two things that ultimately matter in a term sheet. Everything else is either derivative of those two categories or is legal boilerplate.
Economics: Where the Money Goes
Liquidation Preferences
The liquidation preference determines who gets paid first when the company is sold, wound up, or undergoes another liquidity event. A 1x non-participating preference is the market standard in 2026 — data from Cooley’s venture financing reports shows that 98 per cent of US rounds and the vast majority of Australian institutional rounds now use this structure. It means the investor gets back their invested capital before ordinary shareholders receive anything, but must choose between taking their preference or converting to ordinary shares and sharing pro rata in the proceeds.
A participating preference is significantly more investor-friendly. The investor takes their 1x return off the top and then participates in the remaining proceeds as if they had converted to ordinary shares. This double-dip can dramatically reduce what founders and employees receive on a moderate exit. If your term sheet includes a participating preference, treat it as a major concession and negotiate hard — either to remove it entirely or to cap participation at a specified multiple (typically 2x to 3x).
A multiple liquidation preference (2x or 3x non-participating) is a red flag. It means the investor must receive two or three times their investment before anyone else sees a dollar. These terms appear in down rounds, bridge financings, or situations where the investor has significant leverage. They are not standard and should be resisted where possible.
Anti-Dilution Protection
Anti-dilution clauses protect investors if the company raises a subsequent round at a lower valuation — a down round. There are two main mechanisms:
Broad-based weighted average is the founder-friendly standard. It adjusts the investor’s conversion price based on a formula that accounts for the size of the down round relative to the company’s overall capitalisation. The adjustment is real but proportionate.
Full ratchet is the investor-friendly extreme. It resets the investor’s conversion price to the new, lower price as if they had invested at that price from the outset, regardless of how small the down round is. A full ratchet can cause massive dilution to founders from even a modest down round. In the current Australian market, full ratchet provisions are rare at Series A and beyond, but they still appear in seed-stage deals where founders have limited negotiating power.
The founder-friendly position is broad-based weighted average anti-dilution with carve-outs for equity incentive plan issuances and other standard exceptions. If full ratchet appears in your term sheet, it warrants serious pushback.
Option Pool
The size of the employee stock option plan (ESOP) and when it is created relative to the investment are economic terms disguised as administrative ones. An investor who requires a 15 per cent ESOP to be established (or topped up) before the investment closes is effectively reducing the pre-money valuation, because the dilution from the new pool comes entirely out of the founders’ and existing shareholders’ stakes — not the incoming investor’s.
The founder-friendly approach is to negotiate the ESOP size based on a realistic 18-to-24-month hiring plan, rather than accepting an arbitrary percentage demanded by the investor. Alternatively, negotiate for part of the ESOP expansion to come from the post-money capitalisation, spreading the dilution across all shareholders.
Control: Who Runs the Company
Board Composition
Board composition is the single most consequential control term in a term sheet. Whoever controls the board controls the company’s strategic direction, can hire and fire the CEO, and approves major transactions.
A founder-friendly board gives founders a majority of seats. At seed and Series A in Australia, a common structure is three directors: two founder-appointed and one investor-appointed. This preserves founder control while giving the lead investor a seat at the table.
An investor-friendly board gives the investor group parity or a majority. A five-seat board with two founder directors, two investor directors, and one mutually agreed independent director is more investor-friendly — the investor effectively needs to convince only the independent director to overrule the founders.
Under Australian law, all directors owe duties to the company under sections 180 to 184 of the Corporations Act 2001 (Cth), regardless of who appointed them. But in practice, nominee directors tend to align with the interests of their appointor. Board composition is not just governance theory — it is operational reality.
The key negotiation points are: how many seats each side controls, who appoints the independent director (if any), and whether the board structure automatically rebalances after subsequent funding rounds. Watch for provisions that give later-round investors the right to appoint additional directors, which can erode founder control over time.
Protective Provisions (Investor Vetoes)
Protective provisions — sometimes called negative covenants or consent rights — give investors the right to veto specific company actions. They appear in over 90 per cent of venture deals. The question is not whether they will be included, but how broadly they are drafted.
Standard protective provisions require investor consent for:
- Issuing new shares or securities (to prevent unauthorised dilution)
- Changing the rights attached to the investor’s share class
- Declaring dividends or making distributions
- Selling all or substantially all of the company’s assets
- Winding up or dissolving the company
- Amending the company’s constitution in a way that adversely affects the investor
These are reasonable. They protect the investor’s economic position without interfering with day-to-day operations.
Investor-friendly expansions to watch for include vetoes over:
- Incurring debt above a specified threshold
- Entering into contracts above a certain value
- Hiring or terminating senior executives (including the CEO)
- Changing the company’s business plan or strategic direction
- Approving the annual budget
The more operational decisions that require investor consent, the less autonomy the founders retain. A term sheet that requires investor approval to hire a new CTO or enter into a commercial partnership above $50,000 is not a partnership — it is a reporting relationship.
Founders should negotiate to limit protective provisions to genuine structural protections and resist any that give investors a veto over operational management.
Drag-Along Rights
Drag-along provisions allow a specified majority of shareholders to force all other shareholders to participate in a sale of the company on the same terms. In the Australian market, the drag threshold is typically between 66.67 per cent and 75 per cent of shares, often requiring approval from both a majority of ordinary shareholders and a majority of preference shareholders.
A founder-friendly drag-along sets a high threshold (75 per cent or higher), includes a minimum price floor (so the drag cannot be exercised at a price that does not return the investors’ capital), and requires that all shareholders receive the same per-share consideration.
An investor-friendly drag-along sets a lower threshold, can be exercised by the preference shareholders alone (without requiring ordinary shareholder consent), and may include carve-outs that allow investors to receive their liquidation preference before the drag proceeds are distributed.
The risk for founders is straightforward: an aggressive drag-along lets investors force a sale of the company at a time and price that serves the investor’s fund timeline but may not reflect the company’s potential.
Founder Vesting
Founder vesting provisions determine what happens to a founder’s shares if they leave the company. The market standard is four-year vesting with a one-year cliff, meaning the founder forfeits all unvested shares upon departure.
An investor-friendly twist is reverse vesting on the founder’s existing shares — requiring that shares the founder already holds become subject to a new vesting schedule post-investment. This is common at seed stage but should come with credit for time already served. If you have been building the company for 18 months before raising, your vesting schedule should reflect that.
Another term to watch is acceleration on change of control. Single-trigger acceleration (all shares vest immediately on an acquisition) is founder-friendly. Double-trigger acceleration (shares vest only if the founder is terminated without cause following an acquisition) is investor-friendly, because it keeps the founder locked in through a post-acquisition transition period.
Reading the Overall Balance
No single clause makes a term sheet founder-friendly or investor-friendly. It is the combination that matters. A term sheet with a reasonable valuation, 1x non-participating liquidation preference, broad-based weighted average anti-dilution, a founder-controlled board, and narrowly drafted protective provisions is firmly founder-friendly. Swap the board for investor parity, add a participating preference and broad investor vetoes, and the same valuation number tells a very different story.
The practical test is: after signing this term sheet, who needs whose permission to run the company? If the answer is that the founders need investor consent for most significant decisions, the term sheet is investor-friendly regardless of the headline economics.
What Founders Should Do
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Read beyond the valuation. The pre-money number is important, but it is one data point. The control provisions will affect your life as a founder far more than a 10 per cent difference in valuation.
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Benchmark against market norms. Know what standard terms look like in the Australian market at your stage. AVCAL publications, the NVCA model documents (adapted for Australia), and your lawyer’s deal experience are the best benchmarks.
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Negotiate control and economics separately. Concessions on economics (a slightly lower valuation, a larger ESOP) may be worth making if you can preserve founder control of the board and limit protective provisions.
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Get independent legal advice early. A lawyer who has seen hundreds of term sheets can identify investor-friendly provisions that a first-time founder might miss. The cost of legal advice at term sheet stage is a rounding error compared to the cost of living with unfavourable terms for the life of the investment.
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Remember it is a relationship. The term sheet sets the legal framework, but the working relationship with your investor will be shaped by trust, communication, and alignment of interests. Aggressive negotiation on every clause can damage the relationship before it starts. Pick your battles — focus on the provisions that genuinely affect control and economics, and be willing to compromise on the rest.
This article provides general information only and does not constitute legal advice. For guidance on term sheet negotiation and venture capital transactions, contact Viridian Lawyers.
