The Most Expensive Money Doesn't Look Expensive
Valuation is the number founders celebrate. It's rarely the number that costs them.
Quick Answers
What should founders look for in a term sheet beyond valuation? Founders ought to prioritize more than just valuation: consider control provisions, anti-dilution protections (investor rights that adjust their ownership percentage if future funding rounds happen at a lower valuation — protecting the investor, but often at the founder’s expense), board composition, and fundraising flexibility. The most expensive capital often appears cheap at first glance.
What are the risks of signing a term sheet before getting a lawyer? Term sheets (non-binding documents that outline the key economic and governance terms of a proposed investment — think of them as the blueprint before the binding contracts are drafted) are not fully binding, but renegotiating agreed terms can be costly in both legal fees and investor goodwill. Getting counsel involved before you agree, not after, is what protects your position and leverage.
What is a SAFE, and how can it unexpectedly dilute founders? A SAFE (Simple Agreement for Future Equity) is an early-stage investment instrument that converts into equity at a later-priced round, and its dilutive impact varies widely. Founders who use template SAFEs without counsel often discover the full dilution effect when it’s too late or extremely costly to restructure.
The founder walked in beaming.
“I agreed to a term sheet. I barely gave up any of my company,” they said, smiling.
While my mouth said “That’s great,” my brain had other thoughts.
I hadn’t seen the term sheet before they signed.
Buckling my metaphorical seatbelt, I kept my smile and asked to take a look at the sheet.
The Fun Part: The valuation was high. It would definitely grab some headlines. The capital was real.
The Less-Enjoyable Part: The terms were heavily slanted toward the investor, with several of them being the type that I would have pushed back on, hard. Worse, they gave the investor enough control that the company would struggle to attract any subsequent investor at all.
The founder didn’t give up a large slice of the company. They gave up more expensive things: relationships, control, and flexibility.
This brings us to a recurring theme in early-stage fundraising: sometimes, the most expensive money a founder can take doesn’t look expensive at first.
What Founders Look at First (And What They Miss)
Most founders laser in on one number: valuation.
The headline figure. The one that gets screenshotted and shared. The one that they can brag about to friends.
Valuation matters, but founders who focus only on it miss terms that control who runs the company and holds real power.
These provisions don’t announce themselves as highlighted items on the terms sheet. There are four situations where I see these show up most often.
The Four Scenarios
1. Handshake deals with friends and family.
No documentation means no joint understanding of the deal. A friend who wires you money without paperwork may genuinely believe they have some degree of control, even if you know for a fact you explicitly told them otherwise. Arrangements without documentation can also damage your future fundraising: sophisticated investors will either walk away or demand documentation before they engage, requiring time, money, and runway (the amount of time a company has before it runs out of cash — typically expressed in months).
2. Desperate capital.
When the runway is short, founders accept terms they’d never take otherwise. The money makes them overlook control provisions (clauses that give investors the right to approve — or block — major company decisions, such as raising additional capital, selling the company, or adding board members), aggressive dilution, and constrained future optionality. Cash is necessary. But there’s a real difference between surviving and trading away the foundation of your company for ninety more days of runway.
I see this particularly in markets where capital is tighter (Cincinnati, Columbus, the wider Midwest). If you’re in one of these markets, do not fall victim to this trap.
3. The brand-name investor.
Conversations with the investor you regularly see and the media can feel like validation — and they can be. But investors with recognizable names know their brand carries value, and because business is business, they commonly price it into their terms. Taking money from a high-profile investor on tough terms can still be the right call, as it can serve as a signaling mechanism. The mistake is taking those terms without understanding exactly what you’re trading.
4. Template documents used without counsel.
Since Y Combinator made the SAFE template freely available, I’ve seen founders pull it and accept investment directly. This scenario keeps me up at night. Depending on how a SAFE is structured (particularly the valuation cap mechanics and whether it’s pre- or post-money), founders can give away significant equity without realizing it until much later.
The Checklist
Every situation is different. But before any founder takes capital or agrees to any deal, I walk them through the same core questions:
Does this deal contain control provisions? Do you understand what they are?
Would any of these terms make it harder to raise a subsequent round?
Is there a conversion feature? Do you understand exactly how it works?
What does this investor bring beyond capital, and do you want to be dealing with them in eighteen months?
If you had six months of runway left, would you still take this money on these terms?
The answers often reveal problems that get missed if the focus is only on valuation.
Back to the Founder
The founder in my office had answers to every item on that checklist. None of them was good for the company.
But the issue wasn’t the terms themselves.
It was the sequence.
They agreed to the term sheet first. Then came the checklist.
Term sheets may not be binding, but renegotiating terms already agreed to is costly in legal fees and goodwill. Once investors know you want the deal, your leverage diminishes.
Run the checklist before you agree. Not after.
The Takeaway
Valuation is the number founders celebrate. As the old saying goes, “the devil is in the deal’s details.”
Before signing or agreeing to a term sheet, slow down, run the checklist, and involve counsel early.
The most expensive money rarely looks expensive on the surface.
Your Next Move
Before your next investor conversation, write down the five checklist questions above. Answer them honestly. Before you’re in the room and have agreed to the terms.
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