When negotiating term sheets, should a founder just focus on anti-dilution clauses?

Many founders are focused on whether or not to include anti-dilution clauses. What they fail to realize is that the funding structure is more complex than just dilution. A VC can invest in a way that it may look like you are holding 50% of the company's common stock, but you may get allocated a much lesser value. For instance, if the VC negotiates a 2X liquidation preference with a full participating feature with a cumulative dividend pay out of 8% per year (and barring dividends to be paid to the common stock holders), the common stock despite having a 50% position may in reality get less than 10% of the company's value at exit. They can also add warrants that currently wont dilute common but on exercise will (it is just a delay effect - makes the founder's stake larger than it actually is). All this mean your stake has been effectively diluted through a variety of means and not just direct dilution. We use random scenarios to prove what a founder will get in different negotiating situations. There are also pay-to-play clauses which also affects common stock value. If you have anti-dilution protections in there, the VCs will simply negotiate a stricter participating preferred stock. The only way to negotiate is to go in with a game theory based model and keep plugging in VC numbers in a Monte Carlo random simulation scenario to see if the founders have a decent RoI under a random exit scenario.

I strongly advise that founders consult with experts like us to see if VC terms are fair game. We can calculate this using prevailing peer volatility considerations. If you are returning a VC more than the average return a VC expects, you are really not negotiating very well. We have reviewed so many SPAs where dilutions have been achieved through several creative terms. The VCs are good at this - they have analysts on their side. Founders need to get someone on their side as well.

We know of companies where the VCs had so many clauses that founders had to renegotiate their stakes when they realized that, in the middle of their  company's development, they wont even get 1% of the return. We had to go in and create a new preferred security class for the founders instead of the usual common stock, just to keep the RoI fair and the morale high.

Series A and Series B term sheet negotiations are critical to realize a fair RoI the founders. Fortunately, today, we have decent models to do this.