Understand and negotiate your first term sheet or SAFE

Understand the two main early-stage funding instruments. A SAFE (Simple Agreement for Future Equity) is the simplest: you receive money now in exchange for equity at a future priced round. A priced equity round means you negotiate a company valuation today and issue shares immediately. For pre-seed, SAFEs are standard. For seed and beyond, priced rounds are common.

The most important SAFE terms: Valuation Cap (the maximum company valuation at which the SAFE converts to equity — lower cap means more dilution for founders), Discount Rate (the % discount the SAFE holder gets vs new investors at conversion — typically 15-20%), Pro Rata Rights (the investor's right to participate in future rounds to maintain their ownership percentage), and MFN (Most Favoured Nation — entitles the SAFE holder to the best terms of any subsequent SAFE you issue).

Use the YC SAFE template if your company is incorporated in the US. It's the industry standard, widely understood by investors, and free. For Nigerian companies, use Lawpadi's Nigeria-adapted SAFE or have a local lawyer draft one based on the YC template.

In a priced round term sheet, the critical terms to understand beyond valuation: Liquidation Preference (who gets paid first in a sale — standard is 1x non-participating; avoid 2x or participating preferred), Board Composition (who controls the board after investment), Protective Provisions (investor veto rights over major decisions), Anti-Dilution Protection (adjustments to investor ownership if you raise at a lower valuation in future), and Drag-Along Rights (the ability for a majority to force minority shareholders to vote yes on a sale).

Never sign a term sheet under pressure of an artificial deadline. Serious investors don't give 48-hour exploding offers. If an investor gives you a very short window to sign, treat it as a yellow flag and slow down.

Get multiple term sheets where possible. Even one competing term sheet dramatically improves your negotiating position. The goal isn't to run an auction — it's to have optionality so you don't accept poor terms out of desperation.

Hire a startup lawyer before signing anything. For Nigerian founders: Femi Longe at SRC Law, or any Lagos-based startup lawyer. For Kenyan founders: IkoSmart Legal. For US entity deals: use Clerky or a YC-referred law firm. Don't use your company's general lawyer — use someone who specialises in startup financings.

Negotiate the things that matter long-term: valuation cap, board composition, pro rata rights, and protective provisions. Don't fight over legal fees or minor administrative terms — it signals inexperience and sours the relationship.

Understand dilution before signing. If you currently own 60% and you're issuing a SAFE with a $1M cap, model out what percentage you'll own post-conversion at your expected Series A valuation. Many founders are shocked by dilution they didn't anticipate.

After closing, update your cap table immediately, file any required documents with your registry (CAC in Nigeria, BRS in Ghana), and send a formal closing confirmation to all parties with executed copies of all documents.