The Biggest Mistakes Founders Make in Valuations & Term Sheets (And How to Avoid Them)

Fundraising is one of the most crucial—and challenging—parts of building a startup. While negotiating valuation and term sheets, even experienced founders fall into common traps that can lead to excessive dilution, loss of control, or unfavorable exit scenarios.

Here are the biggest mistakes founders make when dealing with valuations and term sheets—and how to avoid them.

1. Overvaluing or Undervaluing Your Startup

The Mistake:

Many founders overvalue their startups to raise capital at a higher valuation, only to struggle in later rounds. Others undervalue their company, giving away too much equity early on.

How to Avoid It:

• Benchmark Against Market Comps – Research valuations of startups in your sector at a similar stage.
• Justify Valuation With Data – Investors want traction-based valuations, not arbitrary numbers.
• Consider the Next Round – A high valuation now might make future rounds harder if you fail to meet growth expectations.

Example: A startup raises at a $50M valuation but struggles to justify it in the next round. Investors hesitate, leading to a down round, dilution, and lost credibility.

Pro Tip: A fair, market-aligned valuation attracts the right investors and positions your startup for long-term success.

2. Ignoring Liquidation Preferences (How You Get Paid in an Exit)

The Mistake:

Founders often focus only on valuation and overlook liquidation preferences—which dictate who gets paid first in an acquisition.

How to Avoid It:

• Understand the Impact of 1x, 2x, and Participating Liquidation Preferences – These terms decide whether investors just get their money back—or much more.
• Negotiate for 1x Non-Participating Preference – This is the most founder-friendly structure.
• Model Out Different Exit Scenarios – See what happens to your payout if you sell for $100M vs. $500M.

Example: If an investor has a 2x participating liquidation preference on a $5M investment, they take $10M first—even if you exit at $30M, leaving founders with much less.

Pro Tip: Liquidation preferences matter more than valuation when it comes to how much you actually take home in an exit.

3. Signing a Term Sheet Without Legal Review

The Mistake:

Some founders rush to sign a term sheet without fully understanding its legal and financial implications.

How to Avoid It:

• Always Get a Lawyer to Review Your Term Sheet – Even if you trust your investor, bad terms can haunt you in later rounds.
• Watch for Hidden Traps – Anti-dilution clauses, board control, and pro-rata rights can impact your future.
• Negotiate Before Signing – Term sheets are non-binding, but once signed, investors expect those terms to hold.

Example: A founder signs a term sheet without realizing an aggressive anti-dilution clause is included, leading to massive dilution in a down round.

Pro Tip: You wouldn’t sign a house mortgage without reading the fine print—don’t do it with a term sheet!

4. Giving Up Too Much Control Too Early

The Mistake:

Founders often focus on equity and valuation but don’t realize they’re giving investors too much control over decisions.

How to Avoid It:

• Be Cautious With Board Seats – Too many investor board seats = loss of founder control.
• Negotiate Protective Provisions – Investors often demand a say in hiring, future fundraising, and even your exit.
• Set Clear Voting Rights – Ensure major company decisions aren’t fully controlled by investors.

Example: A startup with three investors holding board seats loses majority voting power, making it impossible for the founder to lead strategy independently.

Pro Tip: Maintain at least equal or majority founder representation on the board as long as possible.

5. Not Thinking About Future Dilution

The Mistake:

Founders celebrate closing a round without considering the long-term impact of dilution from future funding rounds.

How to Avoid It:

• Model Future Dilution Scenarios – What does your equity look like after Seed, Series A, and Series B?
• Understand Pro-Rata Rights – Investors may claim a right to maintain their percentage, limiting new investor allocation.
• Negotiate Equity Pools Carefully – If an employee stock option pool (ESOP) is created before investment, it dilutes founders, not investors.

Example: A founder who starts with 80% ownership after Seed may end up with less than 20% by Series C if they don’t plan for dilution.

Pro Tip: Raising capital isn’t just about getting money—it’s about keeping enough equity to make it worthwhile.

6. Failing to Leverage Multiple Term Sheets

The Mistake:

Accepting the first term sheet offered without seeing what other investors might propose.

How to Avoid It:

• Create Investor Competition – More interest = better terms.
• Don’t Rush to Close a Deal – Founders often panic about running out of cash, but a bad deal is worse than waiting.
• Use One Offer to Negotiate Another – Investors are more flexible when they know other VCs are interested.

Example: A founder who only gets one term sheet ends up accepting a participating liquidation preference and investor board control—terms they could have improved by negotiating.

Pro Tip: More term sheets = more negotiating power.

7. Assuming Investors Are Fully Aligned With Founders

The Mistake:

Thinking that investors always have the same goals as founders. In reality, founders focus on long-term vision, while investors focus on returns.

How to Avoid It:

• Understand Investor Expectations – Are they aiming for quick exits or long-term growth?
• Set Clear Exit Strategy Alignment – Do they prefer an IPO, acquisition, or early payout?
• Get References From Other Founders – Learn how this investor has treated past startups.

Example: A founder wants to build a long-term company, but their investor pushes for an early sale to lock in returns.

Pro Tip: The best investors are strategic partners—not just financiers. Choose wisely.

Final Thoughts: Valuation & Term Sheet Mistakes Can Be Costly

Fundraising isn’t just about securing a high valuation—it’s about securing the right deal with the right investors under the right terms.

Key Takeaways:

• Valuation isn’t everything—understand liquidation preferences, dilution, and control.
• Don’t sign a term sheet without legal review—bad terms can haunt you.
• Protect your board control—investors with too much power can derail your vision.
• Negotiate multiple term sheets—leverage competition for better terms.
• Think long-term—founders who don’t plan for dilution may end up with little ownership.

What’s the biggest fundraising mistake you’ve seen or experienced? Drop your insights in the comments!