Imagine This…

You’ve pitched your heart out.
A VC finally says, “We’re interested. We’ll send over a term sheet.”
Exciting, right? But then, you open the document — and it might as well be written in Greek.

You’re not alone if you’ve felt this.
I’ve been there — sitting with Indian founders, across coffee tables and boardrooms, watching them nod at legal terms they didn’t fully understand, just to keep the momentum going.

But here’s the secret:

Understanding your term sheet is just as important as getting one.

This guide is here to help demystify term sheets, especially for Indian entrepreneurs navigating their first funding round — or their fifth.

Let me walk you through it, clause by clause, mistake by mistake, and win by win.

What Is a Term Sheet — and Why It’s Not Just a Formality

At its core, a term sheet is a non-binding agreement that outlines the key terms and conditions of an investment deal between a startup and an investor.

Think of it as a prelude to the final contract. It sets expectations, defines valuation, rights, and responsibilities, and becomes the foundation for shareholder agreements.

Why Indian Founders Must Pay Extra Attention

Let me be blunt: India’s startup ecosystem has evolved fast — but founder education hasn’t always kept up.

Many founders in India still sign term sheets without fully understanding:

• Dilution math

• Liquidation preferences

• Board seat implications

• Anti-dilution clauses

And this lack of clarity can cost you control, equity, and even your company’s future.

Key Clauses in a Term Sheet — Decoded for You

Let’s break down the most critical components you’ll find in most Indian venture term sheets.

1. Valuation and Capital Raised

What It Means:

This section defines your pre-money valuation, post-money valuation, and investment amount.

In Simple Terms:

If your pre-money valuation is ₹20 Cr and a VC invests ₹5 Cr, your post-money is ₹25 Cr. That means the investor owns 20%.

Watch Out:

• Does it clearly define pre-money vs post-money?

• Is there a valuation cap in case it’s a convertible note?

2. Equity Dilution and Cap Table Impact

What It Means:

How much of your company you’re giving away — and how it affects your existing ownership.

Founder Tip:

Use a cap table calculator. I’ve seen founders get shocked only after the SHA when they realize they’re diluted more than they thought.

Red Flag:

If you’re giving up over 25% in a seed round, pause and rethink — especially if there’s no co-lead or syndicate.

3. Liquidation Preference — Who Gets Paid First?

What It Means:

In a company exit or wind-up, who gets how much — and in what order?

Common Language:

• 1x Non-Participating: Investor gets back what they invested, then remaining amount is shared.

• Participating Preferred: Investor gets their money back plus a share of what’s left.

Why This Matters:

Participating preferences can significantly reduce your returns as a founder in a modest exit.

4. Anti-Dilution Clause — Protection for Investors

What It Means:

If your next funding round is at a lower valuation (down round), this clause adjusts investor equity to protect their value.

Two Common Types:

• Weighted Average (fairer)

• Full Ratchet (founder-unfriendly)

Example:

If your current investor gets full ratchet protection, and you raise your next round at 50% valuation, their equity doubles, and yours shrinks.

5. Board Composition — Who Sits at the Table?

What It Means:

Defines how many board seats are allocated and who gets to appoint them.

Power Dynamics:

If a VC controls the board, they effectively control the company — including CEO replacement, strategy, and funding decisions.

Ideal Split:

• 1 founder rep

• 1 investor rep

• 1 neutral (independent) rep

6. Founder Vesting and Clawbacks

What It Means:

You may have to “earn” your shares over 3–4 years even if you’re the founder.

Why It Exists:

To protect the startup in case a co-founder leaves early.

Real Talk:

Founders often hate this clause. But mutual vesting among co-founders can actually protect long-term equity alignment.

7. Exit Rights and Drag-Along Provisions

What It Means:

Defines investor rights in case of acquisition or IPO.

• Drag-along: If majority investors agree to sell, you may be forced to sell too.

• Tag-along: You can join in if another shareholder is selling.

In Practice:

Drag-along isn’t necessarily evil — but know the thresholds (ideally 75%+ approval).

Mistakes I’ve Seen Founders Make — So You Don’t Have To

Mistake #1: Signing Under Pressure

Founders rush into signing out of excitement or fear of losing the deal. Always take time to review and consult a startup-savvy lawyer.

Mistake #2: Ignoring Legal Counsel

This one baffles me. You’re negotiating millions — yet some founders skip lawyers or use a friend who’s a property lawyer.

Mistake #3: Not Reading the Fine Print

Yes, it’s “non-binding.” But every term sheet sets a precedent. Investors rarely backtrack later. Negotiate now — not post-term sheet.

Negotiation Isn’t War — It’s Collaboration

Here’s what I’ve learned: The best investors don’t mind if you push back — as long as you’re respectful and data-driven.

3 Questions to Ask Before Signing:

1. What happens if things go south?

2. Who controls future decisions?

3. Am I okay with this deal 5 years from now, not just today?

Indian Context: Local Nuances You Should Know

• Indian term sheets often follow standard U.S. venture templates, but compliance and taxation differ (e.g. FEMA, FDI norms).

• SAFE notes and convertible debentures are gaining popularity in early rounds here.

• Angel investors in India may not offer term sheets — but you should still insist on one.
  

Pro Resources for Founders

• iSPIRT and YourStory offer templates.

• Legal platforms like VakilSearch, SeedLegals, or LawSikho offer review services.

• Join founder communities like Headstart, SaaSBOOMi, or 100X.VC portfolio Slack for peer feedback.

Conclusion: Understand It Before You Sign It

Let me leave you with this:

“A term sheet isn’t the finish line — it’s the foundation of your next chapter.”

And if you take nothing else from this guide, remember this:
You don’t need to be a lawyer. But you do need to be informed.

Ask questions. Seek clarity. And don’t be afraid to negotiate.

Because in the end, this is your company, your vision, your journey.