Term Sheets: The Fine Print That Eats Exits

A founder sells her company for $12M and expects a champagne problem: she and her co-founder still hold 60% after one $4M round, so that's $7.2M, right?

Wrong. The round's term sheet gave the investor a 1x participating liquidation preference. At the waterfall: the investor first takes their $4M back, then takes 40% of the remaining $8M — $3.2M more. Investor total: $7.2M on a 40% stake. Founders split $4.8M on a 60% stake.

Nobody lied. She just signed a term sheet she didn't fully price.