Reading a Term Sheet as an Indian Founder

A term sheet is mostly non-binding, which makes founders read it casually. That is the mistake. The economic and control terms in it get copied almost verbatim into the shareholders agreement and the articles of association, and by then they bind for the life of the company. Negotiate at term sheet stage or you do not really negotiate at all.

What follows is a plain reading of the clauses that matter in Indian rounds. It is not legal advice. Have a lawyer who does venture deals in India review your actual document, and have them read it alongside your existing shareholders agreement, because old terms travel forward into new ones.

Liquidation preference decides who gets paid first

Liquidation preference applies on a sale, a merger or a wind up. It has the largest cash effect on founders in most real exits, and it has nothing to do with the valuation headline.

One times non-participating is the market standard at seed and Series A in India. The investor chooses: take their money back, or convert to equity and take their percentage. Not both. At a strong exit they convert and the preference never matters. At a mediocre exit they take their money back and founders share what is left.

Participating preference behaves differently. The investor takes their money back first and then also shares in the remainder pro rata. A two times participating preference on a 40 crore round means the first 80 crore of any exit goes to that investor before anyone else sees anything, and they still take their percentage of the balance after that. Founders accept this in exchange for a higher headline valuation and regret it at exit.

Check three things. Whether participation is capped. Whether the preference is on the amount invested or a multiple of it. And whether preferences stack, so a later investor is paid ahead of an earlier one.

Anti-dilution: full ratchet versus weighted average

Anti-dilution protects an investor if you later raise at a lower price per share. It works by issuing them extra shares, which dilutes everyone else, mostly the founders.

Full ratchet reprices the earlier investor’s entire holding down to the new lower price, no matter how small the down round is. A modest bridge at a low price can transfer a large slice of the company. Full ratchet is aggressive and increasingly uncommon at early stage in India. Push back on it.

Broad-based weighted average is the standard alternative and is what most Indian term sheets now carry. It adjusts the earlier price only partly, in proportion to how much new money came in at the lower price. A small down round produces a small adjustment. The denominator includes all outstanding shares, options and convertibles, which softens the effect further. Narrow-based weighted average counts only issued shares in the denominator, which makes the adjustment noticeably sharper. The word broad is doing real work in that phrase, so read it.

Ask for carve outs, so that ESOP issuances, shares issued on conversion of existing instruments, and shares issued for an acquisition do not trigger the clause.

The ESOP pool and whose dilution it really is

Almost every Indian term sheet asks for the ESOP pool to be created or topped up on a pre-money basis. That one word decides who pays for it.

Pre-money means the pool is carved out of the cap table before the new money goes in. Existing shareholders, which in practice means the founders, absorb all of it. Post-money means the pool dilutes everyone, including the incoming investor. On a round where the investor takes twenty percent and asks for a ten percent pool pre-money, founders are diluted by roughly twenty-eight percent, not twenty.

Two practical moves. First, size the pool from an actual hiring plan for the next eighteen to twenty-four months instead of accepting a round number. If the plan needs six percent, argue for six. Second, if you must accept a pre-money pool, negotiate the size down, or ask that any unused portion is treated as founder shares at the next round.

Board seats and reserved matters

Control terms are quieter than economic terms and often matter more day to day.

• Board composition. At Series A a common structure is two founder seats, one investor seat, and an independent director both sides agree on. Watch for any structure where the investor plus an independent they nominate can outvote the founders.
• Director versus observer. An observer attends and does not vote. Prefer observers for smaller cheques.
• Reserved matters, also called affirmative vote items, are decisions the company cannot take without investor consent. Long lists are normal. The real question is whether the list reaches into operations.
• Reasonable items: issuing new shares, amending the articles, selling the company, related party transactions, borrowing above a threshold, changing the line of business.
• Items to resist: approving the annual budget, hiring above a salary threshold, any single spend above a low number, entering a new sales channel. These convert a board seat into a veto over running the company.
• Ask for rupee thresholds on every consent item, and for a deemed consent clause so that no response within a set number of business days counts as approval.

Terms that outrank the valuation headline

Founders optimise for valuation because it is the number that gets reported. Rank these above it.

• Preference structure. One times non-participating beats a higher valuation carrying participation.
• Pool sizing and timing, because it is real dilution paid entirely by you.
• Scope of reserved matters, because it sets your operating speed for years.
• Founder vesting and reverse vesting, including what happens on a termination and whether there is acceleration on a sale.
• Drag along threshold, which can force you into a sale you do not want.
• Exit or buyback obligations, sometimes drafted as a put option on the company or the promoters after a fixed number of years. These appear regularly in Indian documents, can be onerous, and need careful review of both the trigger date and enforceability.
• Exclusivity and the no-shop period, and how long it locks you out of other conversations.

Finally, read the conditions precedent. They list what you must fix before money lands, and they set your real closing timeline. Common ones include clean ROC filings, an updated register of members, IP assignments from founders and contractors, and settled statutory dues. Start on them the day the term sheet arrives, not the day you sign it. And get a lawyer. The fee is small measured against a preference clause you did not understand.