What founders get wrong in a financing

Founders negotiate valuation because it is the number they understand. Investors concede valuation because it is rarely the term that determines their return.

The option pool goes in before the money

A term sheet that sets a pre-money valuation and also requires an option pool of a given percentage post-closing is, in effect, reducing the valuation. The pool is created out of the pre-money capitalization, which means existing shareholders bear the entire dilution while the new investor's percentage is calculated after it exists.

The negotiation is not whether to have a pool, it is how large it needs to be and whether it is sized to an actual hiring plan for the next twelve to eighteen months rather than a round number. A pool two points larger than necessary is a real transfer of value, and it is invisible if you are only looking at the headline valuation.

Liquidation preference decides who gets paid

A one times non-participating preference is the market standard in Canadian venture financings and is generally reasonable: the investor takes the greater of their money back or their as-converted share. Participation changes the arithmetic materially, because the investor takes their money back and then shares in the remainder. Multiples compound the effect.

On a modest exit, preference terms decide the outcome for founders entirely. Valuation decides almost nothing.

Model it before signing. Run the waterfall at an exit price that is realistic rather than aspirational, and at one that is disappointing. Founders who do this once negotiate preference differently forever after.

Control sits in the protective provisions

Board composition gets the attention, but the operative constraints usually live in the list of matters requiring investor consent: issuing new securities, incurring debt above a threshold, changing the business, selling the company, amending the articles, and often the annual budget. A founder can hold a board majority and still be unable to act without a minority investor's consent.

Read that list as an operating document rather than a legal one. Ask, for each item, what happens if the investor says no, and how quickly you would need their answer in practice.

SAFEs and convertibles are not "later problems"

Instruments that defer the valuation question do not defer the dilution. A stack of SAFEs at different caps, converting simultaneously at a priced round, routinely produces founder dilution well beyond what anyone modelled when signing them one at a time. Maintain a model that shows conversion under a range of round sizes and valuations, and update it every time you sign a new instrument.

Watch also for most favoured nation provisions, pro rata rights that accumulate across many small holders, and side letters that survive into the priced round.

Canadian specifics worth knowing early

Structure decisions made at incorporation and in early rounds affect tax treatment on exit. Whether shares qualify for the lifetime capital gains exemption depends on conditions that must be satisfied over a period before a sale, not arranged the week before closing. Employee equity is taxed differently in Canada than in the United States, and adopting an American plan template without adjustment routinely creates outcomes nobody intended.

These are tax questions with corporate consequences, and they are cheap to address at the outset and expensive to correct later. Involve tax counsel before the structure is fixed, not after.

The clean cap table

Diligence delays are rarely caused by hard legal problems. They are caused by missing signatures, unrecorded transfers, options granted by email without a plan, and a share register that does not reconcile to the spreadsheet. Keeping the corporate record current is unglamorous and it is the single most reliable way to shorten a financing.

This article is general information, not legal advice, and does not create a solicitor-client relationship. The law changes and its application depends on your circumstances. Speak to a lawyer about your situation.