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A term sheet is the negotiating map for a startup investment, not merely a headline valuation. It can set the price, investor ownership, liquidation priority, board influence, veto rights, future-round protection and the conditions for receiving cash. In India, some clauses may bind immediately even when the document is described as “non-binding,” while the final rights come from the signed investment and corporate documents. Before signing, model the fully diluted cap table, read the exit waterfall, identify every binding clause and have India-qualified startup-finance counsel review the transaction.
What a term sheet does—and what “non-binding” really means
Startup India describes a term sheet as a “Non-binding” list of propositions from a venture-capital firm at the beginning of a deal. In practical terms, it records the commercial deal the parties intend to document later. Typical headings cover valuation, the investment instrument, management and board structure, and changes to share capital. Investment can be structured as equity, debt or a combination.
The label is not a blanket escape clause. Angel-investment guidance published by Startup India says most provisions are non-binding except, where applicable, confidentiality and exclusivity obligations. A signed term sheet may therefore restrict disclosure of negotiations or prevent the company from soliciting another investor for a stated period. The definitive share subscription, shareholders’ and related documents then control the completed transaction.
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- Binding effect: mark each paragraph that says it is binding, and check whether the clause applies to founders personally, the company, or both.
- Confidentiality: note what information may be shared, with whom, and for how long.
- Exclusivity or no-shop: check the duration, permitted exceptions and consequences if the investor does not complete diligence or funding.
- Expenses and governing law: confirm who pays advisers’ fees and which courts or dispute process apply.
- Conditions: distinguish a commercial understanding from conditions such as satisfactory diligence, approvals or execution of final documents.
Do not sign on the assumption that a later lawyer can freely renegotiate every point. A short exclusivity period can be commercially important, and a valuation agreed in the term sheet often becomes the anchor for the definitive documents.
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Pre-money vs post-money valuation: how much equity will the investor own?
Pre-money valuation is the negotiated value immediately before the new investment. Post-money valuation is the pre-money valuation plus the cash invested in a simple priced-equity transaction. If the pre-money valuation is ₹20 crore and the investor subscribes ₹5 crore, the post-money valuation is ₹25 crore. Dividing ₹5 crore by ₹25 crore gives a simplified post-money ownership of 20%.
That arithmetic is an illustration, not a valuation opinion or an unconditional ownership result. The actual percentage comes from the share price and the capitalization definition in the documents. The denominator may include existing equity, an unallocated or newly enlarged ESOP pool, and securities that will convert, such as convertible notes or other instruments.
| Item | Simplified illustration | Question to resolve |
|---|---|---|
| Pre-money valuation | ₹20 crore | Is this value calculated before or after any ESOP-pool increase? |
| New investment | ₹5 crore | Is all cash funded at closing or in tranches? |
| Post-money valuation | ₹25 crore | Does the definition include converting instruments? |
| Investor’s simple ownership | 20% | Is the percentage based on a fully diluted, post-pool cap table? |
Ask for the exact capitalization formula, the number of shares issued, the price per share, and the treatment of every outstanding instrument. “20% for ₹5 crore” is incomplete unless both sides agree on what counts in the denominator.
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Dilution means a holder’s percentage falls when a company issues additional shares or rights, even if that holder keeps the same number of shares. A founder who owns 6 million shares still owns 6 million after a financing, but those shares represent a smaller fraction of the enlarged company.
A fully diluted cap table tracks issued shares plus shares reserved for options and shares issuable on conversion of outstanding securities. The 2025 Khaitan & Co India Startup Law & Policy Guidebook describes a cap table as tracking ownership percentage, dilution and equity value through investment rounds. It also notes that ESOP pools are usually reserved before investors are brought in, although pool size varies by stage; that is practitioner guidance, not a statutory rule.
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Illustrative pool negotiation
Suppose founders hold 10 million shares and an investor proposes 2.5 million new shares. Without any pool adjustment, the investor owns 20% after closing (2.5 million of 12.5 million). If the term sheet first requires a 10% post-money ESOP pool, additional option shares are added to the denominator. Depending on the drafting, founders may bear most or all of that pre-money pool dilution, while the investor still receives the negotiated percentage after the pool is counted. The same headline valuation can therefore produce different founder ownership.
Request three versions of the cap table:
- Signing and closing: existing holders, the new issue, the option pool and all converting instruments.
- Pool scenario: the result if the ESOP pool is created or topped up before the financing, and who bears that dilution.
- Future-round scenario: ownership after a later financing at a higher and a lower price, including any anti-dilution adjustment.
Run the numbers by holder and by class, not only as a founder-versus-investor percentage. Include founder vesting or transfer restrictions, employee grants already promised, warrants, convertible securities and any shares reserved under existing agreements.
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The highest valuation is not automatically the best offer. A lower-price deal with a clean, non-participating preference and limited governance rights may leave founders with more practical value than a higher-price deal carrying a multiple preference, broad vetoes and aggressive anti-dilution.
| Comparison axis | What to place side by side | Why it matters |
|---|---|---|
| Cash and valuation | Investment amount, pre-money and post-money definitions | Shows the price and the capital actually available. |
| Fully diluted ownership | Immediate percentages, ESOP treatment and conversion assumptions | Reveals who bears pool and instrument dilution. |
| Exit economics | Share class, preference multiple, participation, conversion and seniority | Determines the sale proceeds before ordinary equity shares participate. |
| Anti-dilution | Trigger, formula, exclusions and affected securities | Can transfer future down-round dilution to founders and other holders. |
| Governance | Board seats, appointment/removal, quorum and reserved matters | Changes who can approve budgets, fundraising, hiring or a sale. |
| Funding conditions | Tranches, milestones, long-stop dates and cancellation rights | A promised amount may not be available unconditionally. |
| Information and transfer | Reporting cadence, inspection, pre-emption, transfer and exit rights | Creates continuing duties and can affect a later sale. |
| Execution burden | Approvals, filings, constitutional amendments and diligence deliverables | A commercially attractive offer can still be slow or costly to close. |
Preference shares and the liquidation waterfall
The Companies Act, 2013 defines preference share capital through preferential rights relating to dividends and repayment of capital. Section 55 says a company limited by shares cannot issue irredeemable preference shares; redeemable preference shares must satisfy statutory conditions, including the Act’s general maximum redemption period, with a special exception for infrastructure projects. The exact instrument, articles and transaction documents must be checked against the current law.
A negotiated liquidation preference is not the same as a guaranteed cash repayment. At a sale or liquidation, first determine the proceeds remaining after creditors and transaction expenses. Then apply the relevant security’s priority, preference amount, participation and conversion terms.
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1x non-participating preference
As a conceptual example, a 1x non-participating preference lets the investor choose either the agreed preference amount or the amount it would receive after converting into ordinary equity. It cannot take both. Conversion may be economically better in a high-value exit.
Participating preference
A participating preference may pay the preference amount first and then allow the investor to share in the residual proceeds with ordinary holders, subject to the negotiated terms. A multiple greater than 1x increases the amount paid before ordinary equity participates. Seniority provisions determine whether one investor is paid before another class or alongside it.
Model at least downside, base and upside sale values under the actual waterfall. A preference that seems modest at a high valuation can consume most proceeds in a below-expectation exit, leaving founders with little. The Royal Academy of Engineering and ANDE Global’s India spinout guide cautions that founders giving up ownership usually also give up some control, often through a board seat, and should understand every commitment.
Anti-dilution clauses: read the trigger and formula
Anti-dilution provisions adjust an investor’s conversion or ownership economics after certain future issuances at a lower price. They are not all alike. A weighted-average adjustment generally considers the price and size of the new issue; a full-ratchet adjustment can reset the protected price to the lower issue price. The reviewed India-focused materials do not establish one universally prevailing form, so do not treat either as an automatic market standard.
Questions for the clause
- What event triggers protection: any lower-priced issue, only a qualified financing, or another defined event?
- Which securities and prices are included in the formula?
- Are employee options, strategic issuances, acquisitions, rights issues or shares issued with board approval excluded?
- Does the adjustment change the conversion ratio, issue more shares, or require another remedy?
- How does it interact with a later financing, existing investor rights and the company’s articles?
Ask for a numerical example using the proposed capitalization. A clause that looks harmless in prose can materially alter founder ownership in a down round and make the next financing harder to negotiate.
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Governance and control terms that change daily decision-making
Equity percentage is only one measure of control. A minority investor can have significant influence through board rights, voting thresholds and reserved matters.
Board composition and appointment rights
Specify the number of seats, who appoints and removes each director, observer rights, quorum requirements and what happens if a director resigns. A board seat can affect budgets, senior hiring, related-party transactions, additional fundraising and a sale process.
Reserved matters and voting thresholds
List decisions requiring investor consent, such as issuing a new class, changing share capital, borrowing above a limit, selling material assets, approving an annual budget, changing the business or entering related-party transactions. Check whether a veto applies to one investor, a class, or a percentage of investors, and whether the threshold can block a future round.
Information, transfer and founder restrictions
Information rights may require monthly or quarterly accounts, budgets, inspection access and notice of material events. Founder vesting, lock-ins and transfer restrictions can affect a founder who leaves or wants to sell shares. Pre-emption rights can require shares to be offered to existing holders before a third-party transfer. Drag-along and tag-along provisions determine who can force or join a sale; read their price, notice and liability mechanics rather than relying on the label.
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Tranches, milestones and other commercial terms
When funding is divided into tranches, identify the amount, date, milestone, evidence required, decision-maker and remedy for a disputed milestone. A milestone that depends on an investor-controlled approval or an ambiguous product metric can leave the company underfunded. Include a long-stop date and what happens to exclusivity if a tranche is delayed.
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Also resolve founder representations, warranties, indemnities, governing law, dispute resolution, publicity, intellectual-property ownership and the conditions for closing. These provisions are often developed in definitive documents, but material commercial obligations should not appear for the first time after the term sheet is signed.
Indian company-law context: what is statutory and what is negotiated
Startup India notes that entity choice depends on factors including taxation, liability, compliance burden, funding and exit strategy. A company raising equity must comply with the Companies Act, 2013 and applicable rules for its share classes and further issue of capital. Section 62 addresses a company proposing to increase subscribed capital by issuing further shares; the procedure depends on the transaction and the current rules.
Statutory requirements should be kept separate from negotiated rights. The Act and the company’s constitutional documents govern matters such as lawful issuance and preference-share conditions. Valuation, board seats, reserved matters, liquidation preference, anti-dilution and information rights are commercial terms that must be drafted consistently with those requirements. The exact approvals, valuation reports, filings, foreign-exchange rules and tax consequences depend on the entity, instrument, investor residency and transaction date; there is no single checklist that safely covers every deal.
From signed term sheet to closing
A common India-focused process is:
- Exchange and mark up the term sheet. Record the capitalization basis, binding clauses, deadlines and conditions.
- Prepare the data room. Organize financial statements, material contracts, intellectual-property records, employment and founder documents, litigation disclosures, regulatory registrations and competitor information.
- Run due diligence. Resolve ownership gaps, undocumented IP assignments, related-party transactions, cap-table errors and outstanding instruments before they become closing conditions.
- Negotiate the definitive documents. These commonly include subscription and shareholders’ agreements and amendments or other instruments needed for the agreed rights.
- Update constitutional documents where necessary. The memorandum of association or articles of association may need amendments for share classes, voting rights, transfer provisions or investor protections.
- Obtain corporate and regulatory approvals. The required board, shareholder, filing, valuation and other approvals depend on the transaction structure and current law.
- Sign, fund and issue shares or instruments. Confirm that conditions precedent are satisfied, money is received as agreed and statutory records are updated.
- Deliver post-closing reports. Set the first reporting date, board calendar and cap-table version that everyone treats as authoritative.
This is a process outline, not a guaranteed sequence. Timing changes when diligence uncovers problems, an investor is overseas, a convertible instrument is used or constitutional amendments are required.
Founder checklist before signing
- Have I received a fully diluted cap table with current shares, options, convertibles and the proposed pool?
- Does the ownership model show immediate ownership and at least one later financing at different prices?
- Who bears dilution from creating or topping up the ESOP pool?
- What exactly is the investor’s preference, participation, conversion choice and seniority?
- What future issue triggers anti-dilution, and can I reproduce the formula with numbers?
- Which board seats, observer rights, quorum rules and reserved matters can block an ordinary business decision?
- Are funding tranches tied to objective milestones, with dates and remedies?
- What information, inspection, pre-emption, tag or drag rights continue after closing?
- Which clauses bind now, for how long, and what happens if the financing does not close?
- Have the company’s articles, cap table, IP ownership and statutory records been checked against the proposed issue?
- Has an India-qualified startup investment lawyer reviewed the actual term sheet and the definitive documents?
Use the signed documents—not an email summary or a spreadsheet—as the final statement of rights. Legal rules, filing processes and market practices can change, so verify the law and transaction-specific requirements for the entity, investor, instrument and closing date.
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