Five contract clauses founders overlook before their first raise
In This Article
Most founders focus their diligence prep on the obvious documents - cap tables, financial statements, IP assignments. But investors often spend as much time on the contract language buried in early agreements as they do on the numbers. Here are five clauses that consistently surface during diligence, and what to do about them before a term sheet is on the table.
1. Assignment of Inventions Clauses
If a co-founder or early contractor built part of your product before signing a formal agreement, an investor's counsel will ask who owns that work. Without a clear, signed assignment of inventions, ownership can be ambiguous - a red flag serious investors will not overlook.
2. Anti-Dilution Provisions
Early convertible notes or SAFEs sometimes include anti-dilution language that can significantly affect ownership percentages in a future round. Founders are often surprised by how these provisions interact with a new investor's proposed terms.
3. Founder Vesting Schedules
Investors expect founder equity to be subject to a vesting schedule, typically with a one-year cliff. If this wasn't put in place at formation, it's one of the first things a term sheet will require - and retrofitting it after the fact requires everyone's agreement.
4. Indemnification Language
Broad, one-sided indemnification clauses in early customer or vendor contracts can create outsized liability exposure. Investors will flag any agreement where your company's downside risk looks disproportionate to the value of the deal.
5. Board Governance Rights
Prior agreements - including advisor agreements - sometimes include board observer rights or veto provisions that can complicate a new investor's governance terms. Review these early, so there are no surprises during negotiation.
Key Takeaways
- Have a qualified attorney review founding documents before you begin fundraising, not after a term sheet arrives.
- Formalize invention assignment and vesting early - retrofitting them later requires unanimous agreement.
- Watch for governance and indemnification language in contracts signed before you had outside counsel.
Frequently Asked Questions
Ideally before you begin fundraising conversations - cleaning up these documents takes far less time before a term sheet deadline than during one.
Often, yes - but it typically takes longer and can affect deal timing. Addressing them proactively keeps your raise on schedule.
This article is provided for general informational purposes and does not constitute legal advice. Consult an attorney regarding your specific circumstances.