The last decade has been pretty friendly to startup founders at the deal table. Term sheets got shorter and deals became less structured. Capital was abundant, the exit window wide open and the outlook strong. Who needs dilution protection when the market is steadily going up and to the right?
Now, with a more volatile market, investor money isn’t flowing as freely, and deals are going to start to look very different.
Amid the uncertainty, some VCs are likely looking to introduce language into term sheets that help derisk their investments if market conditions continue to sour.
For someone like Stephan Osborn, a member at Mintz law firm with experience in the last two startup downturns, many of these investor protections will be nothing new. However, many current venture investors and founders weren’t in this industry a decade ago and may find themselves in unfamiliar territory.
Here are some things founders should keep in mind as they look to raise in a changed market — one in which they may have less leverage.
Liquidation preference
While not all potential risk protections will prove economic in nature, many will be. One area Osborn predicted will start coming up more is liquidation preferences.