Series A term sheet - is 25% dilution normal or am I getting screwed?

We just got our first Series A term sheet and I'm trying to figure out if the terms are standard or if we're being taken advantage of.

Background: B2B SaaS company, $2.1M ARR, grew from $400K last year. Profitable on a contribution margin basis but burning about $50K/month on growth initiatives. Three cofounders currently own 75% (I have 35%, other two have 20% each). Early angel investors and advisors own the remaining 25%.

The term sheet:

• $8M investment at a $32M pre-money valuation
• 20% of post-money ($40M post)
• But they're asking for a 15% option pool increase BEFORE the investment
• Full ratchet anti-dilution protection
• 2x liquidation preference, participating preferred
• Lead gets a board seat + observer rights for another partner

When I do the math with the new option pool, my ownership drops from 35% to like 26%. That's a 25% dilution which seems really high for a first institutional round?

Also not sure about the "participating preferred" thing. My lawyer mentioned it's aggressive but I don't fully understand the implications. Can someone explain in plain English?

Startup attorney here. Your lawyer is correct - this term sheet has multiple non-market terms for a healthy Series A. Let me break down what's standard vs. aggressive:

Market terms for your stage:

The 25% dilution itself isn't crazy for a Series A, but the structure underneath is problematic. You should absolutely negotiate these terms.

Here's how I'd approach the negotiation:

Hard no's (non-negotiable):

1. Change participating preferred to non-participating. This is the most important point. If they won't budge here, seriously consider walking away.
2. Change full ratchet to broad-based weighted average. Explain you need downside protection flexibility for future rounds.

Negotiable items:

1. Liquidation preference: Offer to keep 2x if they make it non-participating. Or push for 1.5x as a compromise. But never accept 2x AND participating.
2. Option pool: Show them your actual hiring plan. If you don't need 15% for hires in the next 18 months, negotiate it down to 10% or make it post-money.

If they refuse to move on the participating preferred, that's a massive red flag about the partnership. Good VCs understand founder alignment matters for long-term success.

VC here (though not one of your potential investors). Chiming in because this is frustrating to see.

At $2.1M ARR with strong growth and profitability, you should be getting clean, founder-friendly terms. The terms you described are what we'd offer to a struggling company with 6 months of runway and no other options.

Some questions to consider:

• Have you run a proper process with 8-10 VCs? Or did you just talk to a few?
• What's your monthly burn and true runway?
• Could you become default-alive (profitable) if you had to?

If you have negotiating leverage, use it. If you don't, creating it (even through getting profitable for 6 months) is worth delaying the round.

Smart approach. Getting to profitability (or near-profitability) completely changes the negotiating dynamic. You go from "need money to survive" to "want money to accelerate growth."

One more thing to add to your counter: ask them to explain their rationale for the participating preferred. Sometimes investors will back down just from having to justify aggressive terms out loud.

Good luck with the process. Feel free to DM me if you need a second set of eyes on the revised terms once you get them.