Startup term sheets in India: the key terms founders should understand

A startup term sheet is a document that outlines the principal commercial and legal terms proposed for an investment. In India, a term sheet typically covers matters such as valuation, investment amount, security type, investor rights, governance and the conditions that must be satisfied before the investment closes.

Founders should understand a term sheet as more than an agreement on how much money an investor will put into the company. Its provisions can influence ownership, control, future fundraising and the options available to founders and shareholders when the business grows or an exit occurs.

Some provisions may be expressly binding even when the wider investment proposal is non-binding. The document must therefore be reviewed on its actual wording.

What are the key terms in an Indian startup term sheet?

1. Pre-money and post-money valuation

Pre-money valuation is the agreed valuation of a company before the new investment. Post-money valuation is the valuation after accounting for that investment on the agreed basis.

For example, if a startup agrees to a pre-money valuation of ₹20 crore and raises ₹5 crore in new equity, its post-money valuation would be ₹25 crore, assuming a straightforward transaction with no additional adjustments.

The investor's implied ownership would be 20% on that simplified basis.

However, the actual percentage can change depending on whether the valuation includes an ESOP pool, how convertible instruments are treated and the precise terms of the investment.

2. Investment amount and security type

The term sheet should identify how much capital the investor proposes to invest and what they will receive in return.

Depending on the structure, this could involve equity shares, preference shares or a convertible instrument.

Founders should understand the rights attached to the proposed security, not just the amount being invested. Different instruments can have different implications for voting, dividends, conversion, liquidation and future financing.

3. Liquidation preference

A liquidation preference determines how certain investors are paid relative to other shareholders in specified events, such as a sale or liquidation, subject to the contractual terms and applicable law.

For example, a participating preference may give an investor a defined return of capital before also sharing in the remaining proceeds. A non-participating structure may instead provide a choice between the preference amount and conversion into ordinary equity, depending on the agreement.

The wording matters. Founders should model different sale values to understand how the provision could affect the proceeds received by each shareholder.

4. Board representation and reserved matters

Investors may request board seats, observer rights or approval rights over specified company decisions.

Reserved matters might include issuing new shares, taking on significant debt, selling major assets or changing the company's business.

Founders should understand which decisions require investor consent and whether those restrictions could affect ordinary business operations or future funding rounds.

5. Anti-dilution protection

Anti-dilution provisions may adjust an investor's conversion price or other economic rights if the company later raises capital at a lower valuation.

Broad-based weighted-average and full-ratchet mechanisms can have materially different effects. Founders should model how each provision could affect ownership and conversion outcomes in a down round.

6. Exit rights and transfer restrictions

Term sheets may address how investors expect to realise their investment, including drag-along rights, tag-along rights and restrictions on share transfers.

These provisions can influence the process for a future sale and the extent to which founders or other shareholders may be required or permitted to participate.

What happens after the term sheet is signed?

A term sheet usually provides the basis for more detailed definitive agreements, such as a share subscription agreement and a shareholders' agreement.

The transaction may also require due diligence, corporate approvals, changes to the company's constitutional documents and regulatory or other consents, depending on the circumstances.

Founders should not assume that every term is non-binding or that signing a term sheet automatically completes the investment. The binding provisions and closing conditions must be checked in the document itself.

Startup India's equity term sheet template provides an example of how investment terms, exit provisions and conditions precedent may be structured.

An illustrative scenario: a high valuation with restrictive terms

Consider an Indian startup offered ₹10 crore at a valuation higher than another investor's proposal.

The higher-valuation offer also contains extensive investor veto rights, a more aggressive anti-dilution provision and a liquidation preference that could materially affect founder proceeds in a modest exit.

The founders compare both proposals using ownership and exit scenarios rather than choosing solely on headline valuation.

The better proposal depends on the company's goals, the detailed terms and the commercial relationship, not valuation alone.

How Vestd can help

Vestd India helps startups manage cap tables, shareholder records and ESOPs, with funding-round modelling capabilities that can help founders assess potential dilution and ownership changes.

These capabilities can support conversations about proposed investment terms by making the equity impact easier to understand. They do not replace legal review of the term sheet or definitive agreements.

Understand the terms before you agree

A term sheet can shape the economics and governance of a startup long after the investment closes. Founders should understand the implications of each material provision and seek independent legal advice before committing.