Author: Treelife

You have received a term sheet. The valuation looks right, the investor seems aligned, and there is pressure to move quickly. Most founders sign within 48 hours of receiving it, having spent all their attention on the headline number and almost none on the 20 clauses underneath it.

That is where the problems start. Liquidation preference determines what you actually receive if the company is acquired at any price below a very high threshold. The bad leaver definition governs what happens to your equity if an investor decides to remove you. The ESOP pool timing quietly shifts a 10-15% dilution entirely onto the founders before the investor’s percentage is even calculated. None of these get the same negotiating attention as valuation. All of them matter more in most exit outcomes.

This article covers every material clause in an Indian term sheet, in the order you will encounter it, with enough depth to know what to push back on and why. It also covers what has changed in VC term sheets since 2022, when a series of high-profile governance failures shifted the negotiating dynamic firmly in favour of investors. The Zostel vs OYO arbitral award is included because it changed how Indian law treats the enforceability of a “non-binding” term sheet, and every founder should understand what it held before acting on one.

What is a Term Sheet?

A term sheet is a pre-contractual document that records the broad commercial understanding between a startup and its investor before the definitive agreements are drafted. It is not a final contract. Its purpose is to align both parties on the key economic, governance, and exit terms so that lawyers can then draft the Share Subscription Agreement (SSA) and the Shareholders’ Agreement (SHA) without re-litigating the commercial basics.

Think of it as an agreed sketch before the architecture drawings. The term sheet answers: at what price, in exchange for what kind of security, with what rights, on what governance terms, and with what exit provisions. Once both parties sign it, the expectation (even if not always the legal obligation) is that these terms will survive into the definitive documents.

The process after signing a term sheet typically runs as follows:

1. Due diligence by the investor: legal, financial, compliance, and IP review
2. Drafting of the SSA (governing the share issuance and subscription mechanics) and the SHA (governing ongoing rights, governance, and exits)
3. Final negotiation on specific clauses that surface during due diligence
4. Board and shareholder approvals, regulatory filings with the Registrar of Companies
5. Closing: documents signed, shares allotted, funds transferred

A term sheet is not the same as a Memorandum of Understanding (MOU). A term sheet is used specifically in investment and acquisition transactions, covers economic and governance terms, and acts as the blueprint for the SSA and SHA. An MOU is broader, used in partnerships or collaborations, and records intent rather than commercial specifics. Both can be drafted as binding or non-binding, but the term sheet convention in India leans heavily non-binding on commercial terms, binding on process terms. For context on how term sheets fit into the broader investment transaction flow in India, see Treelife’s overview of investment transactions in India.

Is a term sheet legally binding in India?

The honest answer is: it depends on how it is drafted and how the parties behave after signing it.

No statute in India defines the legal nature of a term sheet. The general position is that a term sheet is non-binding on its commercial terms but binding on a small set of process clauses. The preamble of a well-drafted term sheet will state explicitly: “This term sheet is non-binding except for Clauses [X, Y, Z] which shall be legally binding on the parties.”

The clauses that are almost always binding, even in a nominally non-binding term sheet, are confidentiality, exclusivity (no-shop), governing law and jurisdiction, and sometimes costs allocation. Everything else (valuation, share structure, liquidation preference, board rights) becomes enforceable only once it is reproduced in the SSA and SHA.

Sample non-binding preamble language: “This term sheet does not create any legally binding obligations, rights, or liabilities on either party, except as otherwise expressly provided herein. The parties are not obligated to proceed with the transaction unless and until mutually acceptable definitive agreements are executed and delivered.”

Sample binding preamble language: “This term sheet constitutes a binding agreement between the parties hereto, subject to the terms and conditions set forth herein. Each party acknowledges that it is entering into this term sheet with the intention of being legally bound hereby, and agrees to negotiate in good faith to finalise the definitive agreements contemplated hereby.”

Binding term sheets are less common in India. They are used when the investor wants to lock in specific economics early, for instance in competitive deal situations where the founder has multiple term sheets on the table.

What did the Zostel vs OYO case establish?

The Zostel Hospitality Pvt. Ltd. vs. Oravel Stays Pvt. Ltd. (OYO) arbitral award (2022 SCC OnLine Del 455) is the most cited Indian precedent on term sheet enforceability, and every founder negotiating a term sheet should understand what it held.

Zostel, a backpacker hostel startup, entered into a term sheet with OYO for the transfer of its business assets, customer data, key employees, software, and IP rights in exchange for a 7% shareholding in OYO. The term sheet’s preamble explicitly stated it was non-binding.

OYO later walked away, citing liabilities discovered during due diligence. Zostel argued that it had fulfilled all the conditions set out in the term sheet and that OYO’s refusal to close was a breach.

The sole arbitrator found against OYO. Despite the non-binding declaration in the preamble, the tribunal held that the detailed conditions in the term sheet, combined with the parties’ actions in partly performing those conditions (Zostel transferring assets and information, OYO conducting due diligence) created a de facto binding agreement. The parties’ conduct and their substantial completion of transactional obligations negated the stated non-binding character.

The broader drafting implication is this: if you act on a term sheet as though it is binding, a court or tribunal may treat it as binding regardless of what the preamble says. The lesson for founders is to be deliberate about what you do after signing a non-binding term sheet. Transferring assets, sharing sensitive data, or winding down conversations with other investors all create reliance that can be used to argue enforceability.

What does a term sheet typically contain?

The content varies by stage. An angel round term sheet will look very different from a Series B term sheet. The table below covers the standard clauses across most Indian equity investment term sheets.

Table 1: Standard term sheet clauses

How is valuation determined in a term sheet?

Valuation in a term sheet is expressed as either pre-money or post-money, and the choice matters for how dilution is calculated.

Pre-money valuation is the company’s assessed value before the new investment comes in. Post-money valuation equals pre-money valuation plus the new investment amount.

The formula is straightforward:

Post-money valuation = Pre-money valuation + Investment amount Investor stake (%) = Investment amount / Post-money valuation

For example, if a company has a pre-money valuation of ₹10 crore and an investor puts in ₹2 crore, the post-money valuation is ₹12 crore and the investor holds 16.67%.

Where the choice of pre vs post-money becomes a negotiation point is in the context of existing convertible instruments: SAFEs, CCDs, or outstanding ESOP grants. If those convert into equity before the new round is priced, the fully diluted share count goes up and every existing shareholder’s percentage goes down.

Pre-money valuation is more common at seed and Series A, where the company’s value before capital is the natural reference point and founders want to anchor the discussion before new money enters. Post-money valuation is more common at Series B and beyond, where investors want clarity on the company’s total value after their cheque lands, and where the investment size relative to company value makes post-money the cleaner metric.

What is the difference between undiluted and fully diluted shareholding?

This is one of the most consequential distinctions in a term sheet and the one most commonly misread by first-time founders.

Undiluted shareholding reflects current issued equity only. Fully diluted shareholding reflects all issued equity plus all outstanding convertible securities as if they have been converted or exercised: ESOPs, SAFEs, CCDs, warrants.

Consider this example. Founders A and B each hold 50% of XYZ Pvt. Ltd. The company has granted ESOPs equivalent to 10% on conversion. On an undiluted basis, A and B each hold 50%. On a fully diluted basis, they each hold 45% and the ESOP pool holds 10%.

Now a new investor M invests for a 25% stake. If the term sheet says the investor will hold “25% of the share capital on an undiluted basis,” A and B’s undiluted stakes fall to 37.5% each. On exercise of ESOPs, they dilute further. If the term sheet says the investor will hold “25% on a fully diluted basis,” the investor’s stake is protected against ESOP conversion: A and B absorb the ESOP dilution, not the investor.

The practical impact: insisting on a fully diluted basis protects the investor but transfers the full dilution cost of ESOP conversion to the founders. Founders should always model both scenarios before agreeing to a fully diluted basis guarantee.

Types of securities: equity, preference shares, CCDs, and SAFEs

The type of security issued to the investor is not just a structural formality. It determines the investor’s rights, tax treatment, and priority in a liquidation event.

Equity shares are the simplest structure. The investor receives ordinary equity and participates in upside and downside proportionally. Used mainly by angels and some early-stage funds.

Compulsorily Convertible Preference Shares (CCPS) are the most common instrument in Indian VC deals. They carry preferential rights (including liquidation preference and anti-dilution) and must convert into equity shares at a predetermined event or after a specified period. Under the Companies Act, 2013, preference shares must be redeemed or converted within 20 years of issue.

Compulsorily Convertible Debentures (CCDs) are debt instruments that convert into equity. They are used frequently when foreign investors are involved because they can help defer the equity valuation question to a later date, and they have distinct treatment under FEMA (Foreign Exchange Management Act, 1999) and the Foreign Direct Investment (FDI) Policy. CCDs that are optionally convertible or redeemable may be treated as debt and attract ECB regulations.

SAFEs (Simple Agreements for Future Equity) are not yet formally recognised under Indian company law in the same way they are in the US. They are used in early-stage deals as a way to invest without pricing a round immediately, with the conversion mechanics triggered by the next priced round. Their regulatory treatment in India, particularly for foreign investors under FEMA, requires careful structuring.

Founders should understand that a high headline valuation paired with a CCPS structure with aggressive liquidation preference can be economically worse than a lower valuation with straight equity. The structure always needs to be modelled alongside the number.

Anti-dilution protection: full ratchet vs weighted average

Anti-dilution provisions protect an investor’s ownership percentage if the company raises a subsequent round at a lower valuation than the round in which the investor participated. This is called a down round.

There are two main types.

Full ratchet anti-dilution is the more aggressive form. It adjusts the investor’s original conversion price all the way down to the price per share in the down round, regardless of how many shares are issued at the lower price. Even if only a single share is issued in a down round, a full ratchet provision triggers a full reset of the investor’s conversion price.

Example: An investor subscribes to CCPS at ₹100 per share in Series A. The company later raises a Series B at ₹60 per share. Under full ratchet, the Series A investor’s conversion price resets to ₹60, meaning they receive more equity shares on conversion, substantially diluting the founders.

Weighted average anti-dilution is the more balanced form. It adjusts the conversion price based on both the lower price and the number of new shares issued at that price. The formula is:
New conversion price = (Old conversion price × Old shares outstanding + Investment amount) / (Old shares outstanding + New shares issued)

This means a small down-round issuance has a limited effect on the existing investor’s price. A large issuance at a much lower price has a more significant effect. The adjustment is proportional rather than absolute.

For founders, full ratchet anti-dilution is extremely aggressive and can leave very little equity for the founding team if the company hits a rough patch and raises a down round. Weighted average is the market standard in most Indian VC term sheets today. Within weighted average, there are two variants: broad-based (includes all outstanding shares, options, and convertibles in the denominator) and narrow-based (includes only issued shares). Broad-based is more founder-friendly. Treelife’s detailed guide on understanding anti-dilution provisions covers the mechanics and negotiation positions in further depth.

Liquidation preference: the clause that determines what founders actually receive

Liquidation preference determines who gets paid first, and how much, when the company is sold, merges, or winds up. It is arguably the clause with the largest direct financial impact on founders in an acquisition scenario, and it receives far less attention than valuation in most term sheet negotiations.

There are three main structures.

Straight (non-participating) preferred: The investor receives a multiple of their original investment before any proceeds are distributed to common shareholders. Once that preference is paid, the investor does not participate further in the remaining proceeds.

Example: Investor puts in ₹20 lakhs for 10% equity with a 1x non-participating liquidation preference. Company is acquired for ₹1 crore. Investor receives ₹20 lakhs first. Remaining ₹80 lakhs is distributed to all shareholders including founders.

Participating preferred (double-dip): The investor first receives their preference multiple, and then also participates in the distribution of remaining proceeds alongside common shareholders in proportion to their equity stake. This is heavily tilted in the investor’s favour.

Example using the same scenario with participating preferred at 1x: Investor receives ₹20 lakhs first. Then participates in the remaining ₹80 lakhs alongside founders at their 10% stake, receiving another ₹8 lakhs. Total investor receipt: ₹28 lakhs from a ₹1 crore exit, despite holding 10% equity.

Partially participating preferred: The investor participates in both the preference and the residual distribution as above, but the total return is capped at an agreed multiple of the original investment. Once the cap is hit, the investor stops participating and remaining proceeds go to common shareholders. This is a compromise between straight and fully participating.

Founders should model all three structures against a range of exit scenarios before agreeing to liquidation preference terms. A 2x participating preferred with no cap can wipe out founder returns at almost any exit below a very high threshold. A 1x non-participating is the most founder-friendly structure and is considered market standard at seed stage. For a deeper look at how these structures are drafted in the SHA, see Treelife’s guide to liquidation preference clauses in shareholders’ agreements.

Board composition, affirmative voting rights, and governance

How does board composition work in a term sheet?

Board composition clauses set out how many directors will sit on the board after investment, how many the investor can nominate, whether the investor gets a full director vote or merely an observer seat, and what quorum requirements apply.

The practical distinction between a director and an observer matters. A director has voting rights and participates in board decisions. An observer can attend meetings and receive board papers but cannot vote. Founders should understand that agreeing to an investor director seat gives the investor formal governance power; an observer right is significantly weaker.

The typical early-stage board is a five-person board: two founder directors, one investor director, and two independent directors. At later stages, investors may push for majority board representation or at least the ability to appoint an independent director of their choice.

What are affirmative voting rights and reserved matters?

Affirmative voting rights, also called reserved matters or veto rights, are specific decisions that require the investor’s approval before the company can proceed. They are the single most negotiated governance clause in a term sheet, and founders consistently underestimate their scope.

Typical reserved matters include:

• Issuance of new shares or other securities (including ESOPs above an agreed pool size)
• Incurring debt above a specified threshold
• Mergers, acquisitions, or sale of substantial assets
• Changes to the core business model or product direction
• Capital expenditure above a specified limit
• Hiring or termination of senior management (CXO level)
• Amendments to the Articles of Association or Memorandum of Association
• Entering into related party transactions above a threshold
• Declaring dividends

The negotiation question is not whether reserved matters exist. They will appear in every institutional term sheet, but how broadly they are defined and at what thresholds they trigger. A reserved matter requiring investor approval for any debt above ₹5 lakhs in a company with a ₹50 crore revenue run rate is operationally unworkable. Founders should push for high thresholds, specific rather than broad definitions, and a mechanism for deemed approval if the investor does not respond within a set number of days.

How have VC governance demands changed since 2022?

The governance failures at several high-profile Indian startups between 2021 and 2024, involving fund diversion, undisclosed debts, falsified financials, and conflicts of interest, changed the term sheet negotiation dynamic substantially. Investors who previously insisted on light-touch rights now negotiate for a significantly expanded governance package.

Clauses that have become standard or near-standard in institutional term sheets since 2022 include:

• Expanded bad leaver definitions: previously limited to fraud or wilful misconduct, now extended to criminal complaints, breach of investment documents, breach of non-compete obligations, and sometimes even reputational events
• Mandatory appointment of an independent CFO acceptable to the investor, with the investor having approval rights over the appointment
• Creation of audit and compensation committees, with the compensation committee specifically tasked with reviewing founder and key management salaries
• Periodic compliance checks and inspection rights (not merely information rights), giving investors the right to access company records and conduct audits
• Covenants on anti-corruption compliance and, for companies with ESG-sensitive investors, environmental and social governance commitments
• Conflict of interest disclosures requiring founders to disclose income sources, directorships in other companies, and any advisory roles
• KPI-based earn-out or deferred payment structures, where a portion of the investment is conditional on the company meeting agreed milestones post-investment

Founders receiving institutional term sheets in 2025 and 2026 should expect these provisions as standard, not as aggressive asks. The negotiation is now about scope and thresholds, not about whether to include them.

Promoter lock-in, vesting, and fall-away rights

Investor lock-in provisions ensure that founders remain with the company for a defined period after investment. When an investor bets on a startup, a large part of the bet is on the founding team. The lock-in gives the investor confidence that the founders will not exit immediately after the cheque clears.

Two things are negotiated in lock-in clauses: the duration and the nature. Duration typically ranges from two to four years at early stages. Nature refers to whether it is a 100% lock-in (no dilution of any kind allowed) or a partial lock-in (founders can sell a defined percentage in specific circumstances, usually genuine liquidity needs agreed upfront).

Reverse vesting is a related concept that catches first-time founders off guard. In a reverse vesting arrangement, founders who already own equity are required to “re-vest” that equity over a new period tied to post-investment service. If a founder leaves before the re-vesting schedule is complete, the unvested shares are forfeited or transferred to the company at a nominal price. This is common in early-stage deals and effectively imposes a new cliff period on existing shareholders. For a full breakdown of how vesting schedules are structured and enforced in India, see Treelife’s guide to founder vesting in a shareholders’ agreement.

Bad leaver vs good leaver definitions govern what happens to a founder’s unvested shares when they leave. A good leaver (typically resignation for genuine personal reasons, death, permanent disability) usually retains vested shares and receives fair value or nominal value for unvested shares. A bad leaver (fraud, wilful misconduct, breach of obligations) forfeits unvested shares at nominal value or loses them entirely. Since 2022, bad leaver definitions have expanded significantly. Founders should negotiate explicit, exhaustive definitions of what constitutes a bad leaver event rather than accepting broad discretionary language.

Fall-away rights are the counterbalancing mechanism for founders. The lock-in is given on the assumption that the investor will remain committed for a meaningful period. If the investor subsequently sells down their stake below an agreed threshold, or if the investor fails to participate in a follow-on round they committed to, the founders’ fall-away rights are triggered: they are released from the lock-in period that would otherwise apply. This clause is highly negotiated and often absent from first drafts. Founders should insist on it.

Founder clawback is a related but distinct provision. It allows the investor to reclaim a portion of the founder’s equity if specific performance milestones or KPIs are not met within agreed timelines. Clawback provisions are more common in PE-backed deals than in early-stage VC, but they are increasingly appearing at Series A and Series B. Founders must ensure that clawback triggers are specific, measurable, and achievable, with agreed dispute resolution mechanics for cases where performance is disputed.

Transfer restrictions: ROFO and ROFR

Transfer restrictions govern when and to whom shareholders can sell their shares. They protect existing investors from having a third party they did not choose, and may not want, become a co-investor.

There are two standard mechanisms.

Right of First Offer (ROFO): The selling shareholder must offer their shares to the ROFO holder before approaching any third party. The ROFO holder then makes a price offer. If the seller accepts, the deal is done. If the seller rejects the offer, they can sell to a third party, but not at a price lower than the ROFO holder’s offer.

Right of First Refusal (ROFR): The selling shareholder finds a third-party buyer and agrees on a price, then brings that offer to the ROFR holder. The ROFR holder has the right to match the third-party offer and buy the shares at that price. If they match, the seller must transact with the ROFR holder rather than the third party.

The key difference: ROFO requires the seller to come to the right-holder first, before finding a buyer. ROFR requires the seller to find a buyer first, then give the right-holder a chance to match. ROFR is generally more investor-friendly because it eliminates the pricing uncertainty of ROFO. Founders with ROFR should understand they cannot complete a share sale without giving the investor the opportunity to block it by matching.

Exit rights: drag-along, tag-along, IPO, and buyback

Exit provisions define how and when investors can realise returns. They are often more impactful long-term than valuation, particularly if timelines are aggressive or rights are one-sided.

IPO: When the company lists on a recognised stock exchange, all shareholders gain the ability to sell publicly. Term sheets often set an expected IPO timeline and may include provisions that trigger drag-along rights if an IPO has not occurred by a specified date. Statutory lock-in periods under SEBI regulations apply to promoter holdings post-IPO.

Trade sale: A sale of the company or a significant portion of it to a strategic acquirer. Term sheets typically give investors the right to trigger exit provisions if a bona fide trade sale offer is received above a minimum valuation threshold.

Tag-along rights: Allow minority shareholders to join a sale being made by a majority or controlling shareholder on the same terms. If a founder sells 30% of their stake to a third party, a tag-along right allows the investor to sell a proportional portion of their own stake to the same buyer at the same price. This protects minority investors from being left behind when a controlling shareholder exits.

Drag-along rights: Allow a majority shareholder (often the investor in a significant stake scenario) to compel all other shareholders to sell their shares on the same terms when a prospective buyer wants to acquire 100% of the company. The drag-along is primarily an investor protection that prevents founders from blocking a sale the investor wants to pursue. Founders should negotiate the minimum consent threshold required to trigger drag-along, the minimum valuation at which it can be triggered, and the timeline within which drag-along can be exercised.

Buyback: A company can buy back its own shares under Sections 68-70 of the Companies Act, 2013. Buybacks cannot be done selectively; the offer must be made to all shareholders, and if more shareholders want to tender than the buyback percentage permits, shares are accepted on a pro-rata basis. Buyback is an exit mechanism but a limited one, particularly for companies that do not have surplus cash.

ESOP pool: size, timing, and the dilution trap

Employee Stock Option Plans (ESOPs) are a standard feature of startup cap tables. The ESOP pool represents a reserved percentage of equity that will be used to grant options to employees over time. Under the Companies Act, 2013 read with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 for listed entities, ESOPs are a regulated instrument with specific vesting, exercise, and disclosure requirements.

The term sheet negotiation around ESOPs has two components that founders need to watch carefully.

First, the size of the ESOP pool. Investors typically ask for an ESOP pool of 10-15% on a fully diluted basis. This is reasonable. What matters is whether the pool is created before or after the investment.

If the ESOP pool is created before investment, the dilution falls entirely on the founders. The investor’s percentage is calculated on the post-pool, pre-investment cap table, meaning the investor is buying in at a valuation that already accounts for the full ESOP dilution. If the pool is created after investment, the dilution is shared between founders and the new investor.

The economic difference is significant. Assume a ₹10 crore pre-money valuation and a ₹2 crore investment. If a 10% ESOP pool is created before the investment, the founders absorb all of that 10% dilution before the investor’s percentage is calculated. If it is created after, the dilution is shared. Founders should always model both scenarios and negotiate for post-investment pool creation where possible, or push for a smaller pre-investment pool with a top-up mechanism later.

Second, future ESOP grants above the agreed pool size are typically reserved matters requiring investor approval. Founders should make sure the initial pool is sized to last at least two to three years without requiring approval for top-ups.

Anti-competition and non-solicitation clauses

These clauses are common in institutional term sheets and are often signed without founders fully understanding their scope.

Anti-competition provisions restrict founders from engaging in any business that competes with the investee company, directly or indirectly, for a defined period and within a defined geography. They typically cover: starting a competing venture, joining a competing company as an employee, director, or advisor, and sharing proprietary knowledge or trade secrets with a competitor.

The enforceability of post-employment restraint of trade provisions under Indian law is a nuanced area. Section 27 of the Indian Contract Act, 1872 renders agreements in restraint of trade void as a general rule. However, Indian courts have upheld reasonable restrictions in the context of protecting legitimate business interests where the restriction is geographically and temporally limited and tied to actual confidential information. Founders should not assume anti-competition clauses are unenforceable simply because Section 27 exists. The safer approach is to negotiate scope, geography, and duration to reasonable limits.

Non-solicitation provisions restrict founders from recruiting employees, clients, or business partners away from the investee company to any new or competing venture. These are generally more enforceable than pure non-compete clauses and should be negotiated carefully: time period (12-24 months post-departure is common), definition of solicitation (active vs passive), and whether it applies only during employment or also post-departure.

Employment terms of promoters (including minimum commitment of time, primary employment obligations, and consequences of breach) are typically included in the same section or closely linked to it.

Exclusivity (no-shop) clause

The exclusivity clause prevents the startup from negotiating with or entertaining offers from other investors for a specified period, typically 30 to 90 days. It gives the investor a window to complete due diligence and finalise terms without the risk of being outbid or replaced.

Exclusivity is almost always binding from the date of signing the term sheet, even if the rest of the term sheet is non-binding.

The three negotiation points for founders:

First, duration. Thirty days is reasonable for a straightforward deal. Ninety days is a long time to be locked out of other capital conversations, particularly at seed stage. Push for 45-60 days with a clearly defined extension mechanism.

Second, triggers for expiry. If the investor misses agreed milestones, for example failing to deliver a due diligence report within 30 days, the exclusivity should automatically lapse. This protects founders from an investor who holds exclusivity but does not progress the deal.

Third, automatic renewal. Some investors now insist on automatic renewal of the exclusivity period if delays are caused by the promoter or company. Founders should resist open-ended automatic renewal and instead negotiate a fixed extension cap.

Representations and warranties

Although the term sheet itself is non-binding on commercial terms, the representations ground laid in it flows directly into the binding warranties in the SSA and SHA. The practical consequence is that founders who sign a term sheet with aggressive representations risk personal liability when those representations are reproduced in the definitive documents.

Common warranty areas that surface in term sheets and carry risk include: intellectual property ownership (founders confirming that all IP developed prior to investment is owned by the company, not personally), regulatory compliance (no outstanding notices, penalties, or proceedings), capitalist structure accuracy (the cap table is complete and there are no side letters or undisclosed equity commitments), and litigation (no pending or threatened proceedings).

Founders should review representations at the term sheet stage, not just at the SSA stage. The moment a representation is included in the term sheet, it becomes the reference point for warranty scope in the final documents. If a representation is inaccurate, disclose it before signing, not after.

Conditions precedent

Conditions precedent (CPs) are the list of actions that must be completed before the investor is obligated to transfer funds and before the share allotment occurs. They are a standard feature of every term sheet and definitive agreement.

Typical CPs include: completion of satisfactory due diligence, receipt of required regulatory approvals, amendments to the Articles of Association to reflect new investor rights, resolution of outstanding ESOP or compliance issues identified during diligence, and execution of all definitive documents.

The negotiation risk that founders often miss is overloaded CPs. An investor can include so many pre-conditions that closing the deal becomes difficult, giving the investor an option to walk away if market conditions change. Founders should ensure CPs are specific and finite, that a deadline is set for their completion, and that there is a deemed waiver mechanism if the investor does not object to a CP item within a set number of days of being notified of completion.

Dispute resolution: arbitration seat and governing rules

The dispute resolution clause is binding in almost every term sheet, regardless of the non-binding nature of the rest of the document. It sets out how disputes will be handled and, critically, where.

Indian startups generally prefer arbitration to litigation because of the relative speed, confidentiality, and finality of the process. The Arbitration and Conciliation Act, 1996 governs domestic arbitration; international commercial arbitration seated in India is also governed by Part I of the same Act.

The key negotiation point is the seat of arbitration. For purely domestic deals (Indian founders, Indian investors), Mumbai or Delhi is standard. For cross-border deals with foreign investors, the negotiation becomes material. Foreign investors often push for internationally recognised seats: Singapore (SIAC rules), London (LCIA rules), or New York (AAA rules). Indian founders generally prefer to keep arbitration in India to avoid the cost and logistics of foreign proceedings.

A common compromise for cross-border deals is Singapore, given its familiarity with Indian commercial law, its established arbitration infrastructure under SIAC, and its enforceability of awards in India under the New York Convention. Hong Kong and Dubai (DIFC) are also used as neutral venues.

The term sheet should specify: the preferred method (arbitration or litigation), the seat, the institutional rules governing the arbitration, the number of arbitrators, and the language of proceedings. Leaving any of these undefined creates a secondary dispute about the mechanics of resolving the primary dispute.

Information rights, inspection rights, and reporting

Investors have a legitimate interest in monitoring the companies they back. Information rights in a term sheet define what financial and operational data the company must share, how frequently, and in what format.

Standard information rights include: monthly or quarterly management accounts, annual audited financials, annual budgets and business plans, and notice of any material adverse developments.

The distinction between information rights and inspection rights matters. Information rights give the investor access to documents the company provides. Inspection rights give the investor (or their nominees) the right to physically access the company’s premises, books, and records, and to conduct independent audits. Inspection rights are significantly broader and more intrusive. Since 2022, institutional investors routinely ask for inspection rights in their term sheets rather than mere information rights.

Founders should negotiate: the frequency of mandatory reporting (quarterly is reasonable; monthly can be operationally burdensome for early-stage companies), the scope of inspection rights (access during business hours with notice, not open-ended anytime access), and confidentiality obligations on the investor for information received.

Case study

Situation: Pre-Series A deep-tech founder in Bengaluru. First institutional term sheet received from a domestic VC. Founders had no prior investment experience.

Challenge: The term sheet included a 2x participating liquidation preference, a 15% ESOP pool to be created pre-investment, and an investor right to approve any hiring above ₹8 lakhs annual CTC. The drag-along could be triggered with 25% investor consent.

What Treelife did: Modelled the liquidation preference across five exit scenarios from ₹10 crore to ₹200 crore. Negotiated participating preference down to 1x non-participating. Moved ESOP pool creation to post-investment, reducing founder dilution by approximately 3.5%. Raised the hiring threshold to ₹25 lakhs CTC and the drag-along consent threshold to 51% of all shareholders.

Outcome: Founders retained an additional 3.5% equity on a fully diluted basis and avoided a liquidation preference structure that would have left them with less than 20% of exit proceeds at any acquisition below ₹80 crore.

FAQs on Term Sheets in India

Q: Is a term sheet legally binding in India?
A: Generally no, on commercial terms. A term sheet is usually non-binding except for specific clauses: confidentiality, exclusivity, governing law, and costs allocation. However, the Zostel vs OYO arbitral award (2022 SCC OnLine Del 455) established that parties’ conduct after signing can make a nominally non-binding term sheet enforceable. Founders should be deliberate about how they act on a term sheet before the definitive agreements are signed.

Q: What is the difference between a term sheet and an MOU?
A: A term sheet is used specifically in investment and acquisition transactions, covers commercial and governance terms, and acts as the blueprint for the SSA and SHA. An MOU is used in partnerships and collaborations to record intent and scope of cooperation. Both can be drafted as binding or non-binding, but term sheets in India follow a well-established non-binding convention on commercial terms.

Q: What is the difference between pre-money and post-money valuation?
A: Pre-money valuation is the company’s value before the new investment. Post-money valuation equals pre-money plus the investment amount. If pre-money valuation is ₹10 crore and the investor puts in ₹2 crore, post-money is ₹12 crore and the investor holds 16.67%. The choice matters most when outstanding convertibles affect the fully diluted share count.

Q: What is fully diluted shareholding and why does it matter?
A: Fully diluted shareholding counts all issued shares plus all outstanding convertible instruments (ESOPs, SAFEs, CCDs, warrants) as if converted. If an investor insists on “25% on a fully diluted basis,” they are protected against ESOP conversion diluting their stake, meaning founders bear the full cost of ESOP conversion.

Q: What are the three types of liquidation preference?
A: Straight (non-participating) preferred: investor receives a multiple of investment before common shareholders, then stops. Participating preferred (double-dip): investor receives the multiple and then also participates in remaining proceeds alongside common shareholders. Partially participating preferred: investor participates in both but total return is capped. 1x non-participating is the most founder-friendly and is market standard at seed stage.

Q: What is the difference between full ratchet and weighted average anti-dilution?
A: Full ratchet resets the investor’s conversion price entirely to the new lower price in a down round, regardless of the size of that round. Weighted average adjusts the conversion price proportionally, based on the average of old and new prices weighted by share count. Broad-based weighted average is the most common and most founder-friendly form.

Q: What is a drag-along right and when can it be triggered?
A: A drag-along right allows a majority or specified shareholder to compel all other shareholders to sell their shares on the same terms when a buyer wants 100% of the company. Founders should negotiate the minimum consent threshold (ideally 51% of all shareholders, not just investors), the minimum valuation at which drag-along can be triggered, and the timeline for exercise.

Q: What is reverse vesting and how is it different from regular vesting?
A: Regular vesting applies to new equity or options granted to employees and advisors. Reverse vesting applies to equity a founder already holds, requiring them to re-earn it over a new post-investment vesting schedule. If a founder leaves before the reverse vesting schedule completes, unvested shares are forfeited or bought back at nominal value. It is common in early-stage deals and often catches founders off guard.

Q: What is a bad leaver event and how has the definition changed recently?
A: A bad leaver event triggers the forfeiture or forced transfer of unvested founder equity, usually at nominal value. Historically, bad leaver events were limited to fraud, wilful misconduct, or criminal conviction. Since 2022, institutional investors routinely include breach of investment documents, breach of non-compete obligations, and criminal complaints (even unproven ones) as bad leaver triggers. Founders should negotiate an exhaustive and specific definition.

Q: What is an ESOP pool and why does the timing of its creation matter?
A: An ESOP pool is a reserved percentage of equity for employee options. If the pool is created pre-investment, founders absorb the full dilution before the investor’s stake is calculated. If created post-investment, the dilution is shared. A 15% pre-investment pool can reduce founder equity by significantly more than a 15% post-investment pool, depending on the deal structure. Always model both and negotiate for post-investment creation.

Q: What is the difference between ROFO and ROFR?
A: Right of First Offer (ROFO): the selling shareholder must offer shares to the right-holder before approaching any third party. The right-holder makes a price offer; the seller can decline but cannot sell to a third party below that price. Right of First Refusal (ROFR): the seller finds a buyer and agrees a price, then gives the right-holder the opportunity to match. ROFR is more investor-friendly and more commonly sought by institutional investors.

Q: What is exclusivity and what should founders negotiate?
A: Exclusivity (no-shop) prevents the startup from speaking to other investors for a defined period. It is typically binding from the date of signing. Founders should negotiate: duration (45-60 days is reasonable), automatic expiry if the investor misses agreed milestones, and a cap on any automatic renewal of the exclusivity period if delays are caused by the company.

Q: What should founders do before signing a term sheet?
A: Have the term sheet reviewed by legal counsel experienced in VC transactions. Model the economic impact of liquidation preference and anti-dilution clauses across a range of exit scenarios. Check whether ESOP pool creation is pre or post-investment. Verify the scope of reserved matters and whether operating thresholds are workable. Confirm the arbitration seat and its cost implications for your specific investor profile. Review founder obligations, lock-in period, reverse vesting, and bad leaver definitions carefully.

Q: What happens after a term sheet is signed?
A: The investor conducts due diligence (legal, financial, compliance, IP). Lawyers draft the SSA and SHA. Both parties negotiate any terms that surface during diligence. Board and shareholder approvals are obtained. Regulatory filings are made with the Registrar of Companies. The deal closes: documents are signed, shares are allotted, and funds are transferred.

Q: Are anti-competition clauses enforceable in India?
A: Section 27 of the Indian Contract Act, 1872 renders agreements in restraint of trade void as a general rule. However, Indian courts have upheld reasonable restraints that protect legitimate business interests, are limited in geography and duration, and are tied to genuine confidential information. The safer approach for founders is to negotiate scope, geography, and duration to reasonable limits rather than assuming the clause is unenforceable.

Q: What is a term sheet?
A: A term sheet is a pre-contractual document that outlines the key terms and conditions under which an investment will be made. It summarises the core commercial agreement between the founders and the investor before the definitive agreements are drafted, and serves as a template for the Share Subscription Agreement and Shareholders’ Agreement that follow.

Q: Who prepares the term sheet?
A: Generally, the lead investor or the investor’s legal counsel prepares the term sheet and sends it to the founders. At seed stage with angel investors, the founder’s counsel sometimes prepares the first draft. Regardless of who drafts it, founders should have the term sheet reviewed by their own legal counsel before signing anything.

Q: Who signs a term sheet?
A: The lead investor, co-investors if any, and the company (acting through its authorised directors) sign the term sheet. In some deals, the founders sign in their personal capacity as well, particularly where founder-level obligations such as lock-in or non-compete are included.

Q: Do term sheets have signatures?
A: Yes. Term sheets are signed by all parties to indicate agreement to the basic terms and conditions outlined. The signature does not by itself make the commercial terms legally binding (that depends on how the term sheet is drafted), but it records mutual agreement on the framework for the transaction.

Q: How long does it take to prepare a term sheet?
A: The timeline depends on the complexity of the transaction and the negotiation process between the parties. A straightforward seed-stage term sheet between aligned parties can be agreed in one to two weeks. A Series B term sheet with multiple investors, complex governance provisions, and cross-border elements can take four to six weeks of back-and-forth before both sides sign.

Q: What is the term sheet process from start to finish?
A: The process typically runs: initial commercial discussions, investor issues a term sheet, founders review and negotiate key clauses, both parties sign, exclusivity period begins, due diligence runs in parallel with drafting of the SSA and SHA, conditions precedent are satisfied, board and shareholder approvals are obtained, regulatory filings are completed, and the deal closes with share allotment and fund transfer.

Q: What is a term sheet in venture capital vs private equity?
A: In venture capital, a term sheet covers an investment into an early to growth-stage startup, typically via CCPS or equity, with a focus on governance rights, anti-dilution, and exit timelines of five to seven years. In private equity, the term sheet serves the same structural purpose but applies to more mature companies, often involves larger ticket sizes, more detailed earn-out or deferred payment mechanisms, and may include debt components alongside equity.

Q: What is the importance of confidentiality in a term sheet?
A: Confidentiality protects the sensitive information exchanged during negotiations (including deal terms, financial data, and business details) from being disclosed to third parties or competitors. It is one of the few clauses that is legally binding even in a nominally non-binding term sheet. A breach of the confidentiality clause can expose the breaching party to damages claims and can also damage the deal itself if commercially sensitive information reaches the market before closing.

Q: What are the essential elements of a term sheet?
A: The essential elements include: type of security being issued, pre-money or post-money valuation, investment amount and tranche structure, post-investment shareholding pattern on an undiluted and fully diluted basis, board composition and governance rights, liquidation preference, anti-dilution provisions, ESOP pool size and timing, pre-emptive rights, transfer restrictions, exit rights including drag-along and tag-along, exclusivity period, confidentiality obligations, and governing law and dispute resolution mechanism.

Q: What is the difference between a binding and non-binding term sheet?
A: A non-binding term sheet serves as a framework for negotiations. It records what the parties have broadly agreed on but does not compel either party to complete the transaction. A binding term sheet legally obligates both parties to proceed on the terms set out, subject to due diligence and execution of definitive documents. Both types typically contain a small set of binding clauses (confidentiality, exclusivity, governing law) regardless of the overall binding or non-binding character. Binding term sheets are less common in India and are typically used in competitive deal situations or where the investor wants to lock in economics early.

Regulatory references:

• Companies Act, 2013: Sections 55 (preference shares), 68-70 (buyback), 62 (rights issue and pre-emptive rights), 196-197 (managerial remuneration)
• Indian Contract Act, 1872: Section 27 (restraint of trade)
• Foreign Exchange Management Act, 1999: applicable to foreign investor transactions, CCDs, and FDI structuring
• FEMA (Non-Debt Instruments) Rules, 2019: governs pricing of equity and CCPS issued to foreign investors
• SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021: governs ESOP structure and disclosure for listed entities
• Arbitration and Conciliation Act, 1996: governs domestic and international arbitration seated in India
• Zostel Hospitality Pvt. Ltd. vs. Oravel Stays Pvt. Ltd.: 2022 SCC OnLine Del 455

External sources:

• mca.gov.in
• rbi.org.in
• sebi.gov.in
• incometaxindia.gov.in
• startupindia.gov.in