By Ishpreet Khanuja
There is no handbook for negotiating with investors. For many early-stage founders, raising capital is a high-stakes rite of passage filled with excitement, confusion and a hope for the growth they envisioned for their businesses all along. When one’s venture is starting to gain momentum, an investor showing interest seems like a breakthrough. But knowledge is power, and without cautious and intentional steps forward, a founder might accept terms that limit their control, stall growth or dilute ownership in the business they have built from the ground up.
In a recent Tech Uncensored podcast episode, we get an inside look at the world of fundraising and investor relations for early-stage startups with Ben Su, lawyer and co-founder of Capita, an AI-powered legal services platform. Su unpacks the power dynamics, legal traps and relationship-building strategies that define successful startup financing, drawing not only from his legal expertise but from lived experience.
Su speaks about his own experience when he was once wrongfully detained, facing charges that would later be dropped moments into trial. Su understands, firsthand, how the system treated someone without perceived legal power. What followed was a two-year ordeal of malicious prosecution, but Su leveraged technology and his legal skills to build an effective defense and advocate for himself. That experience shaped his understanding of how inaccessible legal remedies can be for those without the training or resources to defend themselves and why gaining an in-depth understanding of legal strategy can be an invaluable skill for a founder.
Understanding the Power Imbalance
Most first-time founders enter fundraising conversations with passion and vision, but quite often also at a disadvantage. Investors tend to be more experienced, legally resourceful and familiar with the intricacies of deal structures. Su claims founders don’t always recognize predatory terms and, more importantly, how they may play out over the different phases of a startup’s journey.
He says, “There are incubators that will ask for equity stakes in the companies by overly inflating the value of their incubation service. For example, an incubator would say, ‘By joining our incubator, you recognize the value of this service is to be $400,000, which can be converted into the equity of your company based on the SAFE (Simple Agreement for Future Equity) that we are also writing.” However, the SAFE investment is only $25,000.”
Another way this imbalance plays out in agreements that disproportionately benefit investors is by negatively impacting the founder’s influence or the future fundraising potential of the company. These incubators may request equity in exchange for initial access to simple resources, only to later convert that at Series A stage when the company starts to gain traction. (Caveat: Please note that Altitude Accelerator does not take equity in exchange for services provided)
“The catch here is that the conversion will take place at a price ramp,” says Su, “When the equity does not dilute with early rounds; it signals poor founder judgment to future investors. Founders must be able to justify such choices so that people can actually trust you with their money to run the company that they are investing in.”
SAFEs: A Founder-Friendly Alternative
“SAFE is an investment instrument invented by Paul Graham of YCombinator,” explains Su. “It delays valuation until a priced round. It gives investors conversion rights at a valuation cap, and lets founders maintain control during a critical phase of product and market discovery.”
In the typical YC investment model, investors back a large number of startups-say, 100 companies-expecting that, due to the power law of venture returns, only about ten will generate nearly all the returns. This approach is common in Silicon Valley, but less so in Canada. Su clarifies, “investors here often feel uneasy when asked to invest via a SAFE. This discomfort usually stems from uncertainty and a lack of understanding of the legal structure. Investors are more accustomed to traditional share purchase agreements, which provide established shareholder rights and protections under corporate law. “However, this logic doesn’t always fit the startup context,” as Su explains, “where companies are seeking outsized, binary outcomes– it’s either a total loss or a major win.”
Su provides a sample scenario:
SAFEs, especially those with a valuation cap, offer some protection against dilution. A valuation cap SAFE is similar to a call option: you invest, say, $one million, and in return, you have the right to convert that into equity when an event happens at a maximum company valuation (for example, no higher than a typical VC at $five million), regardless of how high the next round’s valuation is. This ensures that even if the company grows rapidly and issues more shares to attract talent, your conversion terms remain favorable. Therefore, this valuation cap can act as an anti-dilution mechanism.
Su also indicates that in high growth startups, they often need to pivot quickly. If an investor invests through a share purchase agreement and takes a board seat, they may unintentionally slow down the company’s ability to adapt, since major changes could require shareholder votes or board approval. SAFEs do not lend themselves to voting rights, and this allows startups to move fast and make crucial changes without procedural delays, explains Su.
For these reasons, Su advises against using traditional share purchase agreements or priced rounds before a company reaches Series A. Data from Carta, according to Su, reveals more than 70%+ of pre-seed rounds are done via SAFEs, not only because they are founder-friendly, but also because they include features that benefit investors.
How Do Founders Respond to the Lure of an Investor Offer?
The lure of investment can be enticing for early-stage founders who are pre-revenue. We asked Su to react to the following scenario:
A founder developing a promising new technology-still pre-revenue and without a working prototype-was recently approached by an investor offering $500,000 in exchange for 30% of the company. The question: Should the founder accept this deal?
According to Su, while $500,000 is a significant sum, giving up 30% equity at such an early stage is a major red flag. Excessive early dilution is risky. Standard practice for early-stage (pre-revenue) startups is to give up between 10% and 20% equity in a seed or pre-seed round, not 30% or more. Su indicates that deals like Y Combinator’s, for example, will offer $500,000 for about 7% equity, which is a useful benchmark.
According to Su, if a founder were to accept these terms, it would guarantee future rounds will be more complicated. As per Su, “If a founder gives away 30% at the start, it leaves little room for future investors and employees. As more rounds happen, the founders’ stake can quickly drop to single digits, which demotivates the team and makes the company much less attractive to venture capital.
This also signals a lack of investor sophistication. Seasoned venture investors rarely ask for such a large stake so early. When later-stage VCs see a cap table with an early investor holding 30%, they may hesitate to invest, fearing complications or lack of founder incentive.
Su explains that the founder always has options, “If one investor is willing to write a check, there are likely others who will too-potentially on much better terms. Founders should shop around and not feel pressured to accept the first offer.”
So, while the money is tempting, taking such a dilutive deal now could severely limit the company’s future prospects. Founders should protect their equity and look for investors who understand the long-term journey of building a high-growth startup.
Term Sheets and Control Provisions
They say bringing on an investor is like beginning a business marriage, and the relationship requires transparency and communication. We asked Su about some red flags founders should watch out for when negotiating terms and what term sheets with excessive control provisions may look like.
“Typically, term sheets are not legally binding,” he shares. “It just spells out the general terms that the investor will invest in your company with. That includes the type of valuation cap, or if it’s a price round, the type of equity, the percentage of equity that they’re looking for, etc.”
The lead investor typically sets the main terms in a term sheet. These terms usually require all other investors to follow the rules established by the lead. Investors writing smaller checks generally don’t have much influence, simply because they aren’t contributing as much capital, therefore have less negotiating power.
Su warns, “Because it’s non-binding, it’s common for founders to use a term sheet from one venture capital firm as leverage when negotiating with others. If you do this, it’s important to act respectfully–if an investor shows faith in you early on, you should reciprocate that trust.
That said, some founders do “shop around” with term sheets to get better offers. “Just remember reputation is important in the startup world, and how you handle these negotiations can have long-term consequences,” says Su.
A Game of Chess, Not Checkers
When forming early partnerships with co-founders, advisors and vendors, founders can often feel pressured to take up offers that seem lucrative in the short term without considering the long-term consequences of their choices. Su compared it to playing chess: “You can’t just think of the next move,” he says. “You have to plan five steps ahead.”
One of the ways to reduce some of the risk and ambiguity of entering such partnerships is having a strong co-founder/investor agreement, complete with reverse vesting. This allows the company to reclaim equity from any founder who leaves early, preventing dead weight on the cap table, “especially when 99% of the value is to be realized in the future,” he notes, “it would be unfair for the early employees and founders who are remaining on the board.
The Importance of IP Ownership and Exclusivity in Startup Vendor Contracts
It’s very common for early-stage companies to hire external vendors to provide contract development services and build their technology. However, first-time founders often lack experience and leverage in negotiations, so vendors may try to include terms that aren’t in the founder’s best interest-especially around exclusivity and intellectual property (IP) ownership.
A typical practice in software development is for vendors to reuse code they’ve written for one client when working with another similar startup. This means that if you hire a vendor to build your app, there’s a risk that parts of your technology could be repurposed for other clients, which can undermine your company’s uniqueness and IP value.
Su advised caution around development shops that reuse code or claim partial Intellectual Property (IP) ownership. Founders need to ensure clean IP assignments from the start, and pay close attention to their contracts with vendors, especially regarding IP ownership and exclusivity, to avoid problems for future fundraising rounds.
Valuation: Not Just a Math Problem
When it comes to early valuations, Su discourages founders from relying heavily on financial projections if their companies are pre-revenue.
“I see pitch deck slides that say we have $0 in revenue, but we are looking at generating $5 million in two years,” says Su. “That is not really based on facts. But then, how do you value a company pre-revenue?”
Su reveals that early-stage investors invest in the people. “It really is a vibe check,” says Su. “Investors want to see founder-problem fit, a big market, and the right early signs. If you’re solving a real problem with conviction, there are plenty of investors who will back you.”
What Healthy Founder-Investor Relationships Look Like
Su believes the best investor relationships are built on trust, transparency and aligned goals. He shares, “At Capita, every month we write an update to our investors sharing the wins, the losses and what we learned from this month. We’re vulnerable and transparent in the things that we share with our cap table investors.”
He encourages founders to look for investors who don’t just offer financial support but also offer guidance and empathy. He recalls, “Some accelerator program in downtown Toronto asked me, ‘How coachable are you?’ I wouldn’t be here if I did not listen to the advice of my mentors or my investors, right? But I also wouldn’t be here if I listened to every single piece of advice from all experts, consultants and lawyers. At the end of the day, the relationship needs to ensure that the founder is in the driver’s seat. The best thing an investor can do is to
make the insights and experience that they have accessible.”
Empowered, Informed Founders
As Su recounted the intricacies of navigating investor-founder relationships, it became clearer that a strategic founder, when empowered with the knowledge and insights necessary to negotiate a fair agreement, can lead to growth without compromising on primary control.
Investor interest is a good sign, but it’s not the finish line. It provides a founder with the power to ask questions, negotiate terms and actively seek the support their company needs to prosper. That is why clarity, preparation and intentional relationship-building are foundational to a startup’s journey to greatness.
Listen to the full conversation between Ben Su and Altitude Accelerator’s Hessie Jones as they discuss the nuances of raising capital and managing investor relationships. Full of insights, real-world examples and success stories, the episode is a must-watch for founders looking to navigate the complexities of strategic partnerships at an early stage.
