The Term Sheet Red-Flag Scanner: Find the Founder-Unfriendly Clauses Before You Sign
Why this prompt matters
Founders who can't tell which term sheet clauses are actually negotiable either waste legal fees re-litigating standard market terms with their own attorney, or worse, sign away liquidation preferences, anti-dilution protection, or board control that compound through every subsequent financing round. A bad clause in a seed-stage term sheet doesn't cost you once — it costs you at every exit and every future raise after it.
What we use it for
You're a first-time founder who just received a term sheet from a lead investor for your seed round, with a Tuesday deadline to respond, and you've never negotiated a priced round before — your lawyer is available but billing by the hour, and you want to walk into that call already knowing where the real fights are.
Prompt
Act as an experienced startup attorney who represents founders, not investors, and has reviewed hundreds of venture term sheets across seed through Series B rounds. Context: Here is the term sheet I need reviewed: [PASTE YOUR TERM SHEET HERE]. For reference, here is my round stage and approximate size: [E.G. SEED ROUND, $2M, PRE-SEED, SERIES A]. Task: Scan the term sheet clause by clause and flag any terms that are non-standard for this round stage, founder-unfriendly, or genuinely worth negotiating. For each flagged clause, explain in plain English what it means, why it matters in practice, and what a more founder-favorable market-standard alternative looks like. Constraints: - Do not flag standard, market-normal terms as problems — only flag genuine outliers - Do not present this as a substitute for an actual lawyer's review; note explicitly that this is a starting point for that conversation, not a final answer - Rank flagged items by negotiation priority: deal-breaker, worth pushing back on, or minor - Explain clauses in plain English rather than restating the legal jargon back Output format: 1. A summary verdict: how founder-friendly is this term sheet overall, on a 1-5 scale, with a one-sentence reason 2. A table: Clause | What it says | Why it matters | Suggested ask 3. The top 3 negotiation priorities to raise first, in order
Result
Summary verdict: 2/5 — several clauses are meaningfully more investor-friendly than seed-stage market norms; this term sheet needs real negotiation before signing.
Clause table:
Liquidation preference | 2x non-participating preferred | At seed stage, market standard is 1x. A 2x preference means the investor gets 2x their investment back before any proceeds reach common holders, even in a modest exit. | Push for 1x non-participating — this is one of the most common and most negotiable terms on any term sheet.
Anti-dilution | Full-ratchet | Full-ratchet anti-dilution is rare outside distressed or bridge rounds. It means that if you ever raise a down round, this investor's ownership percentage is protected in full, and all the resulting dilution lands on founders and employees instead of being shared. | Request broad-based weighted average anti-dilution, the market standard at every stage outside distressed financings.
Board composition | 2 investor seats, 1 founder seat | At a $2M seed round, giving investors board majority is unusual and hands them effective control over hiring, firing, and future fundraising decisions well before the company has product-market fit. | Ask for a founder-majority board, or a balanced structure such as 2 founder seats, 1 investor seat, 1 mutually agreed independent.
Pro rata rights | Uncapped, applies to all future rounds | This is standard for a lead investor at this stage and not a red flag. | Leave as is.
Vesting | 4-year vesting with 1-year cliff applied retroactively to founder shares | This matches market norms for seed-stage founder re-vesting and protects the company if a co-founder leaves early. | Leave as is.
Top 3 negotiation priorities, in order: 1) Liquidation preference, 2x down to 1x — this single change affects the payout math in every future exit scenario, good or bad. 2) Anti-dilution, full-ratchet to broad-based weighted average — this is what protects your ownership stake specifically in a down round, which is exactly when you can least afford to lose more of the company. 3) Board composition — don't concede board control at the seed stage unless this specific investor is bringing something to the table that's genuinely irreplaceable beyond the capital itself.
This term sheet is workable, but not as submitted. Taking the liquidation preference and anti-dilution points into the next call alone would move this from roughly a 2/5 to a 4/5 on founder-friendliness, and both are common enough asks that pushing back on them won't read as unreasonable to an experienced investor.
A first-time founder with a term sheet and a Tuesday deadline usually has two bad options: sign something they don't fully understand, or burn hours of billable attorney time re-explaining basic venture mechanics before the actual negotiation can start. This prompt is built to close that gap — not by replacing the lawyer, but by making sure the founder walks into that call already knowing where the real fights are.
Why this prompt is built the way it is
The Role instruction specifies a founder-side attorney, not a neutral reviewer, because term sheet review is inherently adversarial — a neutral summary of "what this document says" is far less useful than an advocate's read on "what you should push back on." The model needs an explicit side to take.
The Context section asks for round stage and size because what counts as a red flag is relative to the round. A 2x liquidation preference might be unremarkable in a distressed bridge round and a serious outlier in a healthy seed round — without that anchor, the model can't calibrate.
The Constraints section does the most load-bearing work here. "Do not flag standard terms as problems" exists because an unconstrained model will often pattern-match "legal document" to "be thorough" and flag routine, boilerplate clauses that make the founder anxious about nothing — which trains them to either ignore the real flags or waste the lawyer's time on non-issues. The explicit "this is not a substitute for a lawyer" instruction is a deliberate liability guardrail: this prompt is a preparation tool for a legal conversation, not a replacement for one, and it should say so every time.
The Output Format — overall score, then a clause table, then a ranked top-3 — mirrors how a founder actually needs to use this under time pressure. They don't need to read every clause explanation before the call; they need the three things worth spending their limited negotiating leverage on, identified up front.
Where this earns its keep
The highest-value moment for this prompt isn't a careful, unhurried review — it's the 48 hours between receiving a term sheet and the call where you're expected to respond with questions. Running the document through this prompt before that call turns a vague feeling of "something here seems off" into three specific, defensible asks, which is exactly the difference between a founder who negotiates from a position of informed confidence and one who either caves entirely or pushes back on the wrong things.