Terms Founders accept when they are in a Soup

In an ideal world, fundraising is a position of strength.

The company is growing, capital is abundant, and founders have the leverage to negotiate terms thoughtfully. But startups are rarely built in ideal conditions. Markets turn, growth slows, cash burn outpaces expectations, and suddenly, the balance of power shifts.

This is when founders find themselves “in a soup.”

At that moment, fundraising is no longer about optimizing valuation. It becomes about survival. And survival capital often comes with terms that founders would never accept under normal circumstances.

At Malpani Ventures, we have seen multiple situations—both directly and across the ecosystem—where companies have had to accept difficult terms to extend runway, stabilize operations, or avoid shutdown. These situations offer important lessons for founders, not as cautionary tales alone, but as insights into how investor behavior changes when risk increases.

Case 1: The down round with full ratchet Anti-Dilution

Consider a growth-stage startup that raised its previous round at an aggressive valuation during a bullish market cycle. Over the next 12–18 months, growth slowed, burn remained high, and unit economics failed to improve.

When the company returned to the market, it was clear that the valuation could not be justified.

Investors were still willing to fund the business but only at a significantly lower valuation, along with stronger downside protection.

This is where full ratchet anti-dilution clauses often appear.

Unlike weighted average anti-dilution, which spreads the impact, a full ratchet resets the conversion price of earlier investors to the new, lower valuation. This results in substantial dilution for founders and common shareholders.

In some cases, founders see their ownership meaningfully reduced without raising a large amount of capital.

Why do founders accept this?

Because the alternative is often worse. Without capital, the company may not survive long enough to recover.

The lesson here is simple but critical: aggressive valuations in earlier rounds can create structural pressure later. Protecting long-term flexibility often matters more than maximizing short-term optics.

Case 2: Participating liquidation preferences in distressed raises

In another scenario, a company facing liquidity constraints secured a bridge round from existing investors. However, the capital came with participating liquidation preferences.

Under standard non-participating preference, investors choose either their money back or their share in the upside. In participating preference, they get both their capital back first, and then a share of the remaining proceeds.

In moderate exit scenarios, this can significantly reduce founder returns.

For example, in a $100 million exit, participating preferences can materially shift outcomes in favor of investors, especially if the capital stack includes multiple such layers.

Founders rarely accept such terms in strong markets. But in distressed situations, where capital is scarce and time is limited, these terms become negotiable reality.

The key takeaway is that liquidation structures matter far more than they appear on paper. Founders must model different exit scenarios to understand real outcomes, not just headline valuation.

Case 3: Loss of control through Board and reserved matters

In some cases, founders manage to preserve valuation but give up control.

This often happens when investors insist on:

• additional board seats
• tighter reserved matters
• veto rights on operational decisions

In one instance, a company raised capital at a relatively stable valuation but agreed to a board structure where investors effectively controlled decision-making.

Over time, this impacted:

• hiring decisions
• budget approvals
• strategic pivots

While the founders retained significant equity, their operational autonomy was reduced. This is a subtle but important shift.

Control does not always follow ownership. Governance rights, if not carefully negotiated, can reshape how a company is run.

In difficult fundraising environments, founders may prioritize survival capital over control but the long-term implications can be significant.

Case 4: Founder vesting reset and reverse vesting clauses

Another common term in distressed situations is the introduction or reset of founder vesting. Investors may require founders to re-vest a portion of their equity over a new time horizon. In some cases, this is coupled with “good leaver” and “bad leaver” provisions that define how shares are treated if a founder exits.

From the investor’s perspective, this ensures continued commitment. From the founder’s perspective, it can feel like starting over.

These clauses are particularly common when:

• performance has not met expectations
• there is perceived execution risk
• or new capital is coming in under uncertainty

While these terms can align incentives, they also materially affect founder economics and should be carefully evaluated.

Case 5: Structured Down Rounds with Debt-Like Features

In recent years, another pattern has emerged structured equity rounds that behave almost like debt.

These may include:

• guaranteed returns
• minimum IRR clauses
• redemption rights
• downside protection mechanisms

In such structures, investors are effectively securing their capital with equity upside as an additional benefit. For founders, this can create future pressure, especially if the business does not grow into the expected outcomes.

These structures often appear when investors perceive asymmetric risk but are still willing to participate.

None of these cases are uncommon. They are part of the reality of building companies in uncertain markets. The key insight is that terms are not static. They are a function of leverage.

When the company is performing well, founders have leverage. When the company is under pressure, investors have leverage.

This is not inherently good or bad. It is simply how capital markets function.

However, the consequences of decisions made during difficult moments often last for years.

How Founders can avoid getting into this position

The goal is not to avoid difficult situations entirely - that is often unrealistic.

The goal is to reduce the probability and severity of such situations.

This comes down to a few fundamental principles.

Building with capital efficiency ensures that runway is not overly dependent on external funding cycles. Maintaining realistic valuations in early rounds preserves flexibility for future fundraising. Prioritizing governance and compliance early prevents last-minute friction during critical raises.

Most importantly, maintaining transparent relationships with investors creates alignment during challenging periods.

The Malpani Ventures Perspective

At Malpani Ventures, we recognize that building a startup is inherently uncertain.

There will be phases of strong growth and phases of difficulty. Our approach is to partner with founders for the long term, not just during peak moments.

This means being thoughtful about terms, focusing on alignment, and avoiding structures that create unnecessary friction down the line. We believe that even in challenging situations, it is possible to structure outcomes that are fair, transparent, and aligned with the company’s long-term success.

Because ultimately, venture investing is about building companies that endure.