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A term sheet is the proposed blueprint for a startup financing. It sets out valuation, investment structure, ownership, investor protections and governance before lawyers prepare the binding documents. It is often described as non-binding, but confidentiality and exclusivity can bind immediately, and the signed agreements—not the headline valuation—ultimately determine ownership, control and exit proceeds.
Before signing, model a fully diluted cap table, read every clause labelled binding, test downside and upside exits, and have India-qualified startup-finance counsel review the term sheet and definitive documents.
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What a term sheet is—and what it is not
Startup India describes a term sheet as a “Non-binding” list of propositions from a venture-capital firm at the beginning of a deal. It is a negotiating document that records the parties’ understanding of the principal commercial points so diligence and definitive-document drafting can proceed.
Typical headings cover valuation, the investment instrument, management structure and future changes to share capital. The investment may be equity, debt or a combination. Management provisions can address board composition and appointment or removal procedures. Share-capital provisions can set rights for later issuances and different stakeholder groups.
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“Non-binding” is not a blanket safe harbour. Startup India’s angel-investment guidance says most terms are non-binding except provisions such as confidentiality and, where applicable, exclusivity. Read the signature page and the clauses on governing law, costs, announcements, access to information, confidentiality and no-shop periods. For each clause, identify:
- whether it is expressly binding;
- when it starts and when it expires;
- which parties and disclosures it covers; and
- what happens if either side walks away.
The investment itself is not complete when the term sheet is signed. Diligence, negotiation, corporate approvals, definitive agreements and closing still follow. If the final documents differ from the term sheet, the executed documents control.
Pre-money vs post-money valuation: the ownership calculation
The basic formula
Pre-money valuation is the negotiated value immediately before new capital. Post-money valuation is pre-money valuation plus the investment:
Post-money valuation = pre-money valuation + new investment
In a simplified priced-equity illustration, a company valued at ₹20 crore pre-money that receives ₹5 crore has a ₹25 crore post-money valuation. The investor’s simple post-money ownership is ₹5 crore ÷ ₹25 crore = 20%. This is arithmetic for explanation, not a valuation opinion or an unconditional ownership result.
Actual ownership is determined by the agreed share price and capitalization definition. The denominator may include issued shares, an unallocated or newly created ESOP pool, outstanding options, warrants, convertible notes or other securities. A term sheet that says “20%” without defining that denominator is incomplete.
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Questions that change the denominator
- Is the percentage calculated on an issued-and-paid-up basis or a fully diluted basis?
- Is an existing ESOP pool included?
- Must the pool be increased before the investment, and who bears that dilution?
- How will outstanding convertible instruments be converted?
- Are promised but unissued options, warrants or other rights counted?
- Does the investor’s percentage apply immediately at closing or after a tranche, conversion or milestone?
Ask for the exact pre-close and post-close share counts, not only a rupee valuation. 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 commonly reserved before investors are brought in, while pool size varies by stage. That is practitioner guidance, not a statutory rule or universal market norm.
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Dilution is a fall in an existing holder’s percentage ownership when a company issues additional shares or rights. A founder can own exactly the same number of shares and still own a smaller percentage because the total number of shares has increased.
A simple financing
Suppose founders hold 10 million shares and an investor purchases enough new shares to own 20% after closing. The investor receives 2.5 million new shares, producing 12.5 million shares in total. Founders still hold 10 million shares, but their percentage falls from 100% to 80%.
Who pays for an ESOP pool?
The timing of an ESOP pool can move dilution between founders and the incoming investor. The following illustration uses the same ₹20 crore pre-money valuation and ₹5 crore investment:
| Structure | Founders after close | Investor after close | ESOP pool after close | Economic effect |
|---|---|---|---|---|
| 10% pool created before the investment | 72% | 20% | 8% | Pool is in the pre-money denominator; founders bear the pool top-up before the investor’s 20% is calculated. |
| 10% pool created after the investment | 72% | 18% | 10% | Investor and founders are diluted proportionally by the post-money pool creation. |
The percentages are an illustration of mechanics, not a market standard. Your lawyers and finance team should use the agreed share price, existing securities and the exact pool language.
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Assume a post-close cap table of founders 72%, investor 20% and ESOP pool 8%. If a later financing issues new shares equal to 25% of the post-money company, every existing holder is multiplied by 75%: founders become 54%, the first investor 15% and the pool 6%, while the new investor owns 25%. This is why a fully diluted, scenario-based cap table is more useful than a headline valuation.
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Prepare at least four versions:
- the current cap table, including all issued and promised securities;
- the proposed financing at signing and at closing;
- the proposed ESOP pool increase and conversion of outstanding instruments; and
- a later financing at a lower, similar and higher price.
For each version, show shares, percentage ownership, voting rights and the value of each class. Have counsel confirm that the model matches the term sheet and the company’s statutory records.
Preference shares and the exit waterfall
Under the Companies Act, 2013, preference share capital carries preferential rights relating to dividends and repayment of capital. Section 55 prohibits irredeemable preference shares and subjects redeemable preference shares to statutory conditions, including a general maximum redemption period in the Act and a special exception for infrastructure projects. The current statute, rules and the company’s instrument must be checked for the transaction date; a negotiated liquidation preference is not automatically a guaranteed cash repayment.
At a sale or liquidation, first determine the proceeds left after creditors, employee claims where applicable, taxes, transaction expenses and other senior obligations. Then apply the security-specific priority, conversion and participation terms in the articles and transaction documents.
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Non-participating preference: conceptual example
Assume an investor contributes ₹5 crore for 20% and receives a 1x non-participating preference. On a sale with ₹30 crore available to equity holders, the investor chooses either ₹5 crore under the preference or 20% on conversion, which is ₹6 crore. It chooses ₹6 crore. It does not receive both amounts.
Participating preference: conceptual example
With a 1x participating preference on the same ₹30 crore, the investor first receives ₹5 crore and then shares in the remaining ₹25 crore according to its participation percentage. At 20%, that second amount is ₹5 crore, for a total of ₹10 crore before any other class-specific adjustments. These are conceptual examples, not mandatory Indian law or a claim about a universal market form.
At a ₹10 crore exit, the non-participating investor would normally compare ₹5 crore preference with ₹2 crore on conversion and choose ₹5 crore. A participating investor could receive ₹5 crore plus 20% of the remaining ₹5 crore, or ₹6 crore, subject to the actual documents and senior claims. A generous preference, multiple, participation right or seniority stack can leave founders with little in a below-expectation exit.
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Ask the company’s counsel to produce a sale waterfall for downside, base and upside exits. The model should show each class, its seniority, whether conversion is optional or automatic, whether participation is capped, and how multiple investors rank against one another.
Anti-dilution clauses and future fundraising
An anti-dilution clause adjusts an investor’s conversion price or number of shares when the company later issues securities at a lower price. Its effect depends on the trigger, formula and exclusions.
Terms to inspect
- Trigger: Does it apply to any lower-priced issue or only a specified financing?
- Formula: A weighted-average adjustment generally considers the size and price of the new issue; a full-ratchet adjustment can reset the price to the lower issue price. The economic results can be materially different.
- Exclusions: Are ESOP grants, strategic issuances, acquisitions, conversions or approved employee securities excluded?
- Affected securities: Which preference shares, options or conversion rights are adjusted?
- Interaction: How does the adjustment work with a later round’s documents, conversion mechanics and voting thresholds?
The reviewed India-focused guidance does not establish one universally prevailing Indian-market form. Do not accept labels such as “standard” or “founder-friendly” in place of an actual calculation. Ask counsel to model the clause in a down round, including the resulting founder ownership and the company’s ability to raise enough capital.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Control and governance terms beyond percentage ownership
An investor can gain meaningful control without owning a majority. Compare these provisions side by side when evaluating offers:
| Term | What to check | Practical consequence |
|---|---|---|
| Board composition | Number of seats, observer rights, appointment and removal, chair and casting vote | Determines who participates in operational and strategic decisions. |
| Reserved matters | Investor consent for budgets, borrowing, new securities, acquisitions, related-party deals or senior hires | Can give a minority investor veto power over ordinary financing and business choices. |
| Voting thresholds | Class votes, special majorities and quorum requirements | May prevent action even when founders hold most shares. |
| Information rights | Monthly or quarterly reports, inspection, forecasts and audit access | Creates recurring reporting work and investor visibility. |
| Founder vesting and transfer restrictions | Vesting commencement, bad-leaver treatment, permitted transfers and buyback terms | Can affect personal liquidity and ownership if a founder leaves. |
| Pre-emption rights | Who may participate in future issuances and on what notice | Influences the company’s ability to fill a round quickly. |
| Exit and transfer rights | Tag-along, drag-along, ROFR, ROFO, IPO cooperation and sale processes | Shapes who can sell, when a sale can be forced and how proceeds are allocated. |
| Exclusivity | Duration, permitted discussions and breach consequences | Can restrict alternative financing while diligence is underway. |
| Tranches and milestones | Amount, dates, objective milestones, cure periods and investor discretion | Turns a promised investment into conditional funding and creates execution risk. |
Startup India identifies management structure, board procedures and changes to share capital as common term-sheet subjects. An India-focused spinout guide similarly highlights board seats, voting rights, reporting duties, tranche conditions and negotiation of the equity stake. The practical question is not whether a setup is “standard”; it is which decisions require consent and whether the company can still operate and raise capital efficiently.
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Entity choice affects taxation, liability, compliance burden, funding and exit strategy. Startup India lists several possible forms; the appropriate structure depends on the founders’ facts and the investor’s requirements. For a company issuing equity, the Companies Act applies to share classes and further issues of share capital.
Section 62 addresses a company’s proposal to increase subscribed capital by issuing further shares. The applicable procedure depends on the transaction, existing articles, class rights and current rules. A cross-border investor may also raise foreign-exchange, reporting and valuation questions. The exact approvals, filings, valuation reports and tax consequences cannot be assumed from a generic term sheet.
A common high-level sequence is:
- Exchange and sign the term sheet: mark binding clauses, expiry dates and exclusivity limits.
- Conduct diligence: organise financial statements, tax records, cap tables, employment and founder arrangements, intellectual-property ownership, contracts, litigation, regulatory permissions, market information and competitor data.
- Negotiate economics and control: settle valuation, stake, pool treatment, preference, anti-dilution, board, voting, reserved matters, reporting and tranches.
- Draft definitive documents: review the share subscription or investment agreement, shareholders’ agreement, amended articles and ancillary instruments against the final cap table and waterfall.
- Amend constitutional documents if required: update the memorandum or articles for share classes, voting rights, transfer restrictions or other agreed rights.
- Obtain approvals and close: complete board and shareholder approvals, filings, funds flow, share issuance and post-closing records.
This sequence varies by entity, instrument, investor residency and transaction structure. It is a process outline, not a substitute for legal advice.
A founder’s pre-signing checklist
- Obtain a clean, fully diluted cap table that reconciles to statutory records.
- Define the capitalization basis for the investor percentage, including ESOPs and convertibles.
- Show who bears any ESOP pool creation or top-up.
- Calculate ownership after the proposed round and at least one later financing.
- Read the preference multiple, participation, conversion, seniority and redemption language together.
- Model downside, base and upside exit proceeds by share class.
- Test anti-dilution triggers, formulas and exclusions in a down-round example.
- Map every board seat, observer, reserved matter, veto and voting threshold.
- Check tranche milestones, conditions precedent, cure rights and investor discretion.
- Review founder vesting, transfer restrictions, pre-emption, tag, drag and exit provisions.
- List each clause that is binding, its duration and its remedy.
- Confirm required corporate approvals, constitutional amendments, filings and any foreign-exchange or tax work.
- Use India-qualified startup investment counsel for the actual documents.
The Royal Academy of Engineering and ANDE Global’s A Spinout Guide for Academic Entrepreneurs in India captures the commercial reality: “For equity investment, you will be giving up part of the ownership of the company, and usually also some control (in the form of a board seat), so you need to ensure that you understand everything to which you are committing.” Although that guide focuses on academic spinouts, the warning applies to any founder comparing ownership with control.
Legal rules, filing processes and market practices can change. The Companies Act, applicable rules and transaction documents should be verified for the entity, investor, instrument and closing date; the discussion above reflects information current to 13 October 2026.
The Bottom Line
Choose the term sheet that produces an acceptable fully diluted ownership, governance position and exit waterfall—not merely the highest pre-money valuation. Make the binding provisions explicit, model every dilution event and have India-qualified counsel confirm the definitive documents before money moves.
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