Term Sheet

A term sheet is not a formality between a handshake and the actual investment documents. It sets the valuation floor, determines how much of your company you give up at closing, and locks in governance protections that govern your board and cap table for the life of the investment. Every economic and governance term in the SHA (Shareholders' Agreement) is negotiated from this document — so how it is drafted determines the ceiling on what you can achieve in the detailed round.

The binding clauses — exclusivity, no-shop, confidentiality, expense reimbursement — take effect the moment you sign. The economic terms are technically non-binding, but practically they become anchors that are very hard to move once ink is on paper. Getting the architecture right before the other side's lawyers start drafting is the difference between a founder-friendly close and a months-long negotiation that chips away at your ownership one concession at a time.

At a Glance

• Who needs it: Founders raising Series A, B, or C from institutional investors (VC funds, PE funds, family offices); investors issuing term sheets; startups with outstanding SAFEs or CCDs converting at a priced round.
• Governing law: Companies Act 2013 (share issuance and board rights); FEMA 20R (FDI on automatic or approval route); SEBI AIF Regulations 2012 as amended (if investor is a registered AIF); Indian Contract Act 1872 (binding clause enforceability).
• Turnaround: 5–10 working days for a full first draft; each negotiation mark-up round adds 2–5 days depending on counterparty response time.
• Key threshold: FEMA automatic route sectoral cap must be confirmed before allotment — exceeding it without RBI approval is a compoundable violation. FC-GPR must be filed within 30 days of receiving funds.
• Binding vs non-binding: Exclusivity, no-shop, confidentiality, expense reimbursement, governing law, and dispute resolution bind from signature. All economic and governance terms are non-binding until the SHA and SSA are executed.
• What triggers closing: Satisfactory completion of defined DD scope, board and shareholder resolutions, regulatory approvals where required, and ISIN issuance under MCA dematerialisation requirements.

What's New for FY 2026-27

Several regulatory developments in FY 2026-27 directly affect how term sheets for Indian startups should be drafted and what conditions they should include.

• DPDP Act enforcement is operational: The Digital Personal Data Protection Act 2023 is live. Investor DD now routinely includes a data protection audit for tech companies. Term sheets for SaaS, consumer tech, and fintech companies should define DPDP compliance as a closing condition with a specific cure window — not a blanket post-closing covenant.
• Dematerialisation is mandatory for non-small companies: MCA V3 requires non-small private companies to dematerialise shares before any new allotment. Your company needs an ISIN through NSDL or CDSL before closing. Term sheets that reference physical share certificates as the delivery mechanism are now operationally incorrect.
• Small company threshold revised: The Companies Act revised the small company definition — paid-up capital threshold raised to ₹4 crore and turnover to ₹40 crore. Secretarial audit obligations differ between small and non-small status; confirm your category before the term sheet is signed.
• SEBI AIF Category II updates: SEBI's 2024 AIF amendments affect carry structures and co-investment rights. Term sheets with AIF Category II investors should align board observer rights and co-invest clauses to the updated SEBI AIF framework.
• LEC now required for FC-GPR: RBI requires a Lawyer's Certificate (LEC) alongside the FC-GPR filing for foreign investment. Build the LEC into the closing checklist at term sheet stage — it cannot be treated as a last-minute item.

Why the Term Sheet Architecture Matters

• ESOP pool placement costs real ownership: A 15% ESOP pool sized pre-money places the full dilution on founders and existing shareholders — the new investor's percentage is unaffected. Moved to post-money, the investor shares it. The difference is approximately 1–1.5 percentage points of post-money founder ownership on a typical Series A, and it is only visible when modelled before you sign.
• Exclusivity without milestones freezes your round: A 90-day no-shop clause with no DD completion trigger gives the investor a full quarter of control over your fundraise timeline. Founders who cannot respond to other interested parties during this window lose negotiating leverage permanently.
• Undefined DD scope enables re-pricing: 'Satisfactory completion of due diligence' with no defined topics, materiality thresholds, or remedy ladder gives the investor open-ended walk-away or re-pricing rights after you have stopped talking to other investors.
• SAFE and CCD conversion is not automatic: Outstanding SAFEs and CCDs dilute founders beyond the headline round valuation. A ₹5 crore CCD converting at a 20% discount creates a different effective entry price than the new investor pays — and the combined dilution is often 1–4% above what the term sheet headline suggests without modelling.
• One word changes the liquidation waterfall: The difference between '1x non-participating preference' (Indian market standard) and '1x participating preference' can shift crores at an exit. Participating preference means the investor takes their preference first and then participates in the remainder — that single word is the entire economic issue.
• Anti-dilution protection has a wide range: Broad-based weighted average (BBWA) is the 2026 Indian market standard for Series A and B. Full ratchet — where a down round resets the investor's conversion price to the new lower price entirely — is aggressively investor-friendly and appears in some term sheets without clear labelling.

How It Actually Works

The process runs in six stages, from the first numbers call through to post-closing filings. Each stage has a defined output so you always know what is in progress.

Step 1: Round Architecture & Cap Table Brief

Before drafting begins, we collect round size, investor profile and entity structure, the current cap table with ESOP granted and unvested, all outstanding SAFEs and CCDs, any prior SHA, and the target close date. We also confirm the investor's entry route — direct, Mauritius or Singapore vehicle, or SEBI AIF — because the FEMA route determines what can proceed on the automatic route and what requires RBI prior approval.

Step 2: Dilution & Scenario Modelling

We model the cap table before a single clause is drafted. Pre-money vs post-money ESOP sizing, SAFE and CCD conversion mechanics, secondary participation, and escrow or holdback amounts are all modelled across scenarios to Series B so you know your ownership at each milestone. You receive a plain-language summary of the outcomes alongside the working spreadsheet.

Step 3: Term Sheet Drafting

The full term sheet is drafted as one clean document. Binding clauses are clearly labelled and separated: exclusivity window and scope, no-shop, confidentiality, expense reimbursement, governing law, and dispute resolution. Non-binding economic terms — valuation, board seats, anti-dilution, liquidation preference, ESOP, information rights, and investor protections — follow in a distinct section. No side-letters at this stage; everything material lives in the term sheet.

Step 4: Negotiation & Mark-Ups

Every mark-up from the investor's lawyers is reviewed clause by clause. You receive a plain-English briefing on each proposed change — what the investor is asking for, what the Indian market standard is in 2026, and our recommended position. A concession log is maintained throughout so you can track what has shifted and the cumulative impact on your economics across all rounds of negotiation.

Step 5: Execution & DD Kick-Off

Once signed, exclusivity starts immediately. A structured DD request list is issued within three to five days — organised by work stream (legal, tax, financial, commercial, technical, DPDP and data) — so the investor cannot use a vague 'DD pending' status to delay while your exclusivity clock runs. Weekly status updates run through the DD period.

Step 6: Definitive Documents & Closing

The same team that drafted the term sheet drafts the SHA, SSA, disclosure schedule, and AOA amendment. Protections negotiated at term sheet stage do not narrow in the definitive documents. Closing conditions, board and shareholder resolutions, ISIN and demat coordination, and post-closing FEMA filings including FC-GPR with LEC are managed through to completion.

A Real Example: Series A at ₹150 Crore Pre-Money

A Bengaluru-based B2B SaaS startup raises a ₹30 crore Series A from a Singapore-registered VC fund. Headline pre-money valuation: ₹150 crore. The investor's first draft term sheet includes three items that require modelling before signature.

• 15% ESOP pool, pre-money: Full dilution borne by founders and existing angels. On a ₹150 crore pre-money at a ₹30 crore round, the post-money is ₹180 crore. A 15% pre-money pool sized against ₹150 crore means ₹22.5 crore worth of shares come from existing holders before the new investor enters — the investor's 16.7% stake is unaffected.
• ₹5 crore CCD at 20% discount: Conversion price equals ₹120 per share against the new investor's effective entry price derived from the ₹150 crore pre-money. The CCD holder enters cheaper, increasing total dilution beyond what the headline round valuation suggests.
• Combined founder ownership outcome: Expected post-closing founder stake reading the term sheet headline: approximately 52%. Actual modelled outcome including pre-money ESOP sizing and CCD conversion: approximately 47.3% — a 4.7 percentage point gap invisible without the model.

We surface this before signature. The negotiation then focuses on three separate issues: whether the ESOP pool moves to post-money, whether the CCD conversion discount is capped, and whether the proposed 90-day exclusivity window includes a DD completion milestone. These three issues appear in a single term sheet and require separate treatment in the negotiation.

Post-Signing: Keeping the Round on Track

Signing the term sheet begins the closing process — it does not end the negotiation. Several obligations run in parallel from execution day and the term sheet's drafting determines how much control you retain over each.

• Exclusivity is a live legal obligation: Any solicitation of or negotiation with an alternative investor during the no-shop window — even an informal conversation — is a breach. The investor's remedy depends on the term sheet language: break-fee, specific performance, or damages. Understand the consequence before you sign.
• DD scope is your primary commercial protection: The term sheet's DD definition determines how much re-pricing leverage the investor holds through the closing process. Tightly scoped DD — defined topics, materiality thresholds, time-bound completion, cure-first remedy ladder — converts findings into specific SHA drafting issues rather than open-ended renegotiation.
• FEMA compliance runs on its own timeline: For a foreign investor, sectoral caps and automatic vs approval route must be verified before allotment. FC-GPR must be filed within 30 days of funds hitting the bank. The LEC is now a required attachment. Missing the deadline is a FEMA violation subject to RBI compounding.
• Demat is a pre-allotment step: Non-small private companies need an ISIN from NSDL or CDSL, a registered depository, and a record date before shares can be allotted under MCA V3. First-time demat takes 10–15 working days — this must start at term sheet stage, not closing week.
• DPDP audit may extend DD timeline: Investor DD for tech companies in FY 2026-27 now routinely includes a data protection audit. Build an additional two to three weeks into the DD timeline at term sheet stage, and ensure the remedy for a DPDP finding is a cure window — not a binary walk right.

The term sheet's DD scope definition and remedy ladder are the most commercially important protections you have during the 60–90 days between signature and closing.

Where Term Sheets Go Wrong

• Signing without understanding: Non-binding economic terms become powerful negotiating anchors. Walking away from a signed term sheet has reputational cost in the Indian VC community even when it is legally permissible — the investor network is small.
• Valuation denominator mismatch: Agreeing a pre-money valuation without defining the fully-diluted denominator — which SAFEs convert, which CCDs count, which ESOP grants are included — creates a valuation that means different things to each side and produces a closing dispute.
• Participating preference accepted: One word — 'participating' — can shift crores in the liquidation waterfall at exit. It appears in the term sheet as a bracketed alternative; once agreed, it is very difficult to negotiate out at SHA stage.
• FEMA route not confirmed before signing: A term sheet signed with a foreign investor in a government-route sector (e-commerce FDI policy, NBFC, defence, print media) creates a condition precedent that requires fresh RBI or DPIIT approval post-signature. This kills timelines and gives the investor re-pricing leverage.
• No DD completion milestone: A 90-day exclusivity window with no milestone hands the investor nine weeks of market-freeze time with no obligation to progress. A milestone — 'DD must be completed by Day 45' — or a break-fee alternative is a standard founder protection that many founders forget to ask for.
• DPDP exposure not addressed: If your company has data processing gaps the investor's audit will find, the term sheet needs an explicit cure mechanism. A blanket 'satisfactory DD' condition with no cure window turns a remediable compliance issue into a binary walk right for the investor.
• Different firm for SHA than term sheet: Using a different law firm for the SHA to reduce cost is a common decision that routinely costs founders more in concessions. The gap between term sheet intent and SHA execution is where protections quietly narrow.

What You Receive at the End

• Fully negotiated, execution-ready term sheet with binding and non-binding clauses clearly labelled and separated
• Cap table model with dilution scenarios from current round to Series B (PDF summary and working spreadsheet)
• Concession log documenting every position taken, moved, and held during negotiation mark-ups
• Structured DD request list organised by work stream, ready to issue on signature day
• FEMA route confirmation memorandum — automatic vs approval route, sectoral cap status, timing
• DPDP compliance readiness checklist for investor DD (for tech, SaaS, and consumer companies)
• Closing conditions checklist including ISIN and demat steps, board resolutions, FC-GPR, and LEC requirements
• SHA and SSA drafting brief — a structured handoff document so the definitive document phase starts without re-briefing

How to Get Started

Share your current cap table, round size, investor name and entity details, and any existing term sheet draft — yours or the investor's — through our secure document portal. If you have a prior SHA or outstanding SAFE and CCD instruments, include those too; they are essential inputs for the dilution model. We confirm receipt within one business day and schedule the round architecture call for the next working day.

The drafting clock starts after the architecture call, with a first draft delivered within five working days. If you have already received a term sheet from an investor and need a mark-up and negotiation brief rather than a fresh draft, turnaround is three to four working days from document receipt. An engagement letter with a fixed fee is provided before work begins.