You have been pitching for months. The conversations have been long, the feedback sessions uncomfortable, and the follow-up emails numerous. Then, one morning, an investor expresses genuine interest and asks to send you a term sheet.
For many early-stage founders in India, that moment is a mix of excitement and quiet panic. The excitement is understandable. The panic, however, is avoidable.
A term sheet is not a trap. It is a conversation, structured in the language of investment. The better you understand that language, the more confidently you can participate in the negotiation, protect your interests, and build a relationship with your investor that is grounded in clarity.
This guide walks you through every significant clause you are likely to encounter in a term sheet within the Indian startup ecosystem, in plain language.
What Is a Term Sheet?
A term sheet is a preliminary, non-binding document that outlines the key terms and conditions under which an investor proposes to invest in your company. It is not the final agreement. Think of it as a blueprint for the legally binding documents that will follow, most commonly a Share Subscription and Shareholders’ Agreement (SSSHA).
Most of the term sheet does not bind you to anything. However, certain clauses, typically around confidentiality, exclusivity, governing law, and costs, are legally binding from the moment both parties sign. More on those shortly.
1: Transaction Details
This section sets out the foundational facts of the deal. It may seem straightforward, but every number and description here matters.
1.1 Business Description
A brief statement of what your company does. Ensure this reflects your current operations accurately. Vague or outdated descriptions can cause complications later during due diligence.
1.2 Promoters
In Indian corporate law and investment documents, “Promoters” refers to the founders or controlling individuals of the company. The term sheet will identify them by name. All obligations, vesting schedules, and lock-in provisions tied to promoters apply to the individuals named here.
1.3 Current Capital Structure
This captures your existing shareholding, including the number of equity and preference shares, face value per share, and the percentage held by each promoter. Make sure these numbers match your current Ministry of Corporate Affairs (MCA) filings exactly. Discrepancies here can delay or derail the deal.
1.4 Instruments
This specifies the type of security the investor will receive in exchange for their capital. In early-stage Indian deals, this is often either:
- Equity Shares (direct ownership), or
- Compulsory Convertible Preference Shares (CCPS), which are preference shares that must convert into equity at a future date or event
CCPS is increasingly preferred in Indian seed and Series A rounds because it offers investors certain protections while keeping the equity table cleaner for the moment.
1.5 Valuation
This is the pre-money valuation of the company, meaning the value assigned to your startup before the investor’s capital comes in. If your pre-money valuation is INR 18 crores and the investor puts in INR 3 crores, your post-money valuation becomes INR 21 crores. The investor’s percentage stake is derived from this math.
As a founder, this number sets the tone for your equity dilution. Negotiate it carefully, but also realistically. Overvaluation at the seed stage can create complications in future rounds.
Example
If:
- Pre-money valuation = ₹10 Cr
- Investment = ₹2 Cr
Then:
- Post-money valuation = ₹12 Cr
The investor effectively owns:
₹2 Cr ÷ ₹12 Cr = 16.67%
1.6 Proposed Transaction / Investment Amount
This clause defines how much the investor will put in, across how many tranches, and what percentage of the company they will hold post-investment. It also specifies the target timeline for “Closing,” which is when money moves and shares are allotted.
If the investment is tranched, the term sheet will typically state the conditions that must be met before each tranche is released. Know these conditions before you sign.
2: Key Considerations
This is the heart of the term sheet. Each clause here defines the rights and obligations of both parties after the investment is made.
2.1 Board Composition
Post-investment, your investor will typically have the right to nominate one director to your Board. In many seed-stage deals, they may also nominate a Board Observer, who can attend meetings but cannot vote.
This matters because significant company decisions, from hiring senior leadership to accepting new investment, often require board-level approval. Know who will sit on your board and what powers they carry before agreeing to this clause.
2.2 Pre-emptive Rights
This gives the investor the right to participate in future funding rounds to maintain their ownership percentage. If you raise a Series A and issue new shares, your seed investor gets the first right to buy enough new shares to keep their percentage from being diluted, on the same terms offered to new investors.
This is a standard and reasonable protection for an investor. From your perspective, it means your early backers can stay proportionally invested as you grow.
2.3 Anti-Dilution Protection
If you raise a future round at a valuation lower than the current round (a “down round”), anti-dilution provisions protect the investor by adjusting the price at which their shares were issued, effectively giving them more shares.
Most Indian term sheets use “broad-based weighted average” anti-dilution, which is the most founder-friendly form. Avoid “full ratchet” anti-dilution if you can, as it is far more aggressive and can significantly impact your cap table in a down round.
2.4 Promoters’ Lock-In
After the investment closes, founders typically cannot sell or transfer their shares for a defined period, often three years. This protects the investor from a situation where a founder exits immediately after receiving capital.
This is non-negotiable in most deals and reasonable. An investor is backing you as much as your business. Your commitment needs to be visible.
2.5 Vesting of Promoters’ Shares
Even if you have been building your company for two years before this investment, the investor will typically introduce a vesting schedule on your shares. A common structure: 25% vests immediately, and the remaining 75% vests over four years on a quarterly schedule, with the first quarterly vest occurring at the end of month fifteen.
If a founder leaves during the vesting period, unvested shares revert to the company. This protects co-founders and investors alike from a situation where one founder walks away early but retains full equity.
2.6 Right of First Offer (ROFO)
If the investor wants to sell their shares, they must first offer those shares to the promoters (and other existing investors) before approaching a third-party buyer. The offer must be at a stated price. If the promoters decline, the investor can then sell to others, but not below that stated price.
2.7 Right of First Refusal (ROFR)
This works in the reverse direction. If you, as a promoter, want to sell your shares, you must first offer them to the investors at the same price you have been offered by a third party. The investors can choose whether to buy. If they pass, you can sell to the third party.
Together, ROFO and ROFR give both parties a structured process for any share transfers, preventing surprises.
2.8 Tag-Along Rights
If you sell your founder shares to a third party and investors have not exercised their ROFR, they have the right to “tag along” and sell their shares to the same buyer at the same price and on the same terms. This prevents a situation where a new majority shareholder enters the company without the investors having had a chance to exit alongside you.
2.9 ESOP (Employee Stock Option Plan)
Most investors will require the company to set aside a portion of the cap table, typically between 5% and 15% on a fully diluted basis, for an Employee Stock Option Pool. This pool is used to attract and retain key talent. The creation and administration of the ESOP will need the Investor Director’s approval.
From a founder’s perspective, build your ESOP pool thoughtfully. A well-structured ESOP is one of your most powerful hiring tools at an early stage, particularly when competing with larger companies on salary.
2.10 Affirmative Voting Rights
Certain significant decisions will require the express approval of the investor, either at the board level or at the shareholder level. These typically include raising new debt, changing the business model materially, making acquisitions, amending the articles of association, and issuing new shares.
These are protective rights, not operational control. For the day-to-day running of your business, you retain full authority. For major structural decisions, your investor has a seat at the table.
2.11 Liquidation Preference
This defines who gets paid first and how much, in the event of a “liquidity event,” which includes a sale of the company, a merger, an acquisition, or a winding-down.
A standard liquidation preference entitles the investor to receive either their original investment amount back (plus any declared but unpaid dividends), or their pro-rata share of the proceeds on a fully converted basis, whichever is higher. This protects investors from a scenario where the company is sold at a low valuation.
For founders: in a strong exit, this clause rarely comes into play. In a distressed sale, it determines how much is left for you after investors are paid.
Example
An investor puts ₹5 Cr into the startup.
Later, the company gets acquired for ₹6 Cr.
If the investor has a:
1x liquidation preference
They get their ₹5 Cr first before remaining proceeds are distributed.
Why Investors Want This
To protect downside risk.
What Founders Should Watch
Avoid:
- multiple liquidation preferences (2x, 3x)
- participating preference structures
A standard 1x non-participating preference is generally acceptable.
2.12 Information Rights
As long as the investor holds shares, they are entitled to regular financial and operational reporting. Standard timelines include quarterly unaudited financials within thirty days of each quarter-end, audited annual accounts within sixty days of the financial year-end, and an annual operating plan before the year begins.
Treat these obligations seriously. Investors who feel informed are far more likely to be helpful. Investors who are kept in the dark become nervous, and nervous investors become difficult.
2.13 Exit Mechanism
This clause outlines how and when investors expect to exit their investment. Common exit paths in the Indian context include an IPO (typically within five to six years), a secondary sale to another investor, or a strategic acquisition.
The term sheet will also include a Drag Along provision: if the company and promoters fail to provide an exit within the agreed timeline, the investor gains the right to force a sale of the entire company, including the promoters’ shares, to enable their exit.
This is not an aggressive clause. It is a backstop. Investors need to know they have options if the company fails to create a natural exit opportunity.
2.14 Free Transferability
Investors want the freedom to sell their shares at any time, subject to the ROFO mechanism, without requiring promoter approval, as long as they are not selling to a direct competitor of the company.
3: Documentation and Incidental Matters
3.1 Definitive Documentation
The term sheet is followed by the full legal agreement, the SSSHA, which must typically be executed within ninety days of the term sheet signing. All the clauses above get translated into binding legal language in this document.
Do not sign the SSSHA without independent legal review. The term sheet gives you the framework; the SSSHA is where the details live.
SSSHA stands for Share Subscription and Shareholders’ Agreement.
It is a single, consolidated legal document that combines two agreements that are sometimes executed separately:
Share Subscription Agreement (SSA) governs the actual investment transaction, meaning how many shares are being issued, at what price, for what consideration, and the conditions that must be met before the money moves and shares are allotted.
Shareholders’ Agreement (SHA) governs the ongoing relationship between all shareholders of the company after the investment closes. This is where the rights established in the term sheet get their full legal form: board composition, voting rights, ROFR, tag-along, drag-along, anti-dilution, exit mechanisms, information rights, and so on.
Combining them into a single SSSHA is the standard practice in the Indian startup ecosystem because it is cleaner and more efficient. Both parties sign one document instead of two, reducing the risk of inconsistencies between them.
The flow in practice:
Term Sheet (non-binding, summary of intent) → Due Diligence → SSSHA (binding, full legal agreement) → Closing (money in, shares allotted)
Most institutional investors aim to close within 45 to 60 days if diligence goes smoothly.
3.2 Conditions Precedent to Closing
Before the investor releases funds, a set of conditions must be satisfied. These typically include legal and financial due diligence, all regulatory approvals, execution of employment agreements with promoters, and amendment of the company’s Articles of Association. No conditions precedent, no closing.
3.3 Standstill Provisions
Between the signing of the term sheet and the execution of the final documents, the company agrees not to make any major moves without investor consent. This includes raising new debt, changing the capital structure, making senior hires or terminations, or entering into material transactions.
3.4 Representations and Warranties
The company and promoters confirm that everything stated in the term sheet is true and in compliance with applicable law. Any misrepresentation discovered later can result in liability.
4: General Clauses (The Binding Ones)
4.1 Expenses
Basic transactional costs (due diligence, legal fees, stamp duty) are typically borne by the company, often up to a capped amount. Any additional costs an investor incurs beyond that are their own responsibility.
4.2 Confidentiality (Binding)
All parties must keep the existence of the term sheet and its contents strictly confidential. This applies until the deal closes or the term sheet terminates. Exceptions exist for legally mandated disclosures.
4.3 Exclusivity (Binding)
For a defined period after signing, typically sixty to sixty-five days, you agree not to approach or negotiate with any other potential investor. This gives the current investor the time and assurance needed to complete due diligence and finalize documentation. Breach of exclusivity can have legal consequences.
4.4 Termination
The term sheet typically expires in ninety days if the deal does not close and the parties have not mutually extended it. It terminates automatically upon execution of the Definitive Documentation.
4.5 Governing Law and Jurisdiction
Indian law governs the term sheet, with disputes subject to the jurisdiction of a specified court, usually in the city where the investor or the company is headquartered.
One Clause Worth Watching: Most Favoured Nation (MFN)
Some term sheets, particularly those from institutional seed funds, include an MFN provision. This means you cannot give any existing or future investor terms that are more favorable than those given to the MFN-protected investor, without their prior consent. If you offer a new investor a better deal, your MFN investor has the right to have their terms updated to match.
This is a growing inclusion in Indian seed documentation and worth discussing openly with your legal counsel.
What to Do When You Receive a Term Sheet
Read it fully, twice. Do not skim a term sheet. Every word in this document has been written deliberately.
Engage a startup-focused lawyer. General corporate lawyers may not be equipped to advise on venture investment terms. Seek one who works regularly in the startup ecosystem.
Ask questions, not just lawyers. Reach out to founders who have taken investment from the same investor. Their lived experience is invaluable.
Negotiate what matters, not everything. Founders who push back on every clause signal inexperience or distrust. Identify the two or three clauses that genuinely concern you and negotiate those firmly. The rest, if they are market standard, should be accepted.
Remember: the term sheet is the beginning of a relationship. Your investor will likely be involved in your company for five to seven years. The tone you set during term sheet negotiations shapes that relationship. Be firm, be informed, and be professional.
A term sheet is not a document to fear. It is a document to understand. The Indian startup ecosystem has matured significantly over the last decade, and so have its investment instruments. As a founder, your job is not to become a lawyer, but to become literate enough in the language of investment to protect what you have built and build what you have envisioned.
Read every clause. Ask every question. Sign only when you understand.