Term sheet explainer: every clause in plain English (2026)

A term sheet is a short document, usually 5 to 12 pages, in which an investor sets out the main terms on which they propose to invest: the amount, the valuation, the kind of shares they will receive, and the rights they will hold afterwards. It is mostly non-binding, but it fixes the shape of the deal. The full contracts (a share subscription agreement, a shareholders' agreement and amended Articles of Association) follow it and rarely change the commercial terms.

Mostly no. A term sheet normally says that only four clauses are binding: confidentiality, exclusivity (the no-shop period), reimbursement of expenses, and governing law. The valuation, the share rights and the board terms are statements of intent until the definitive agreements are signed. In practice both sides treat the whole document as settled, because investors rarely improve terms after signing.

A liquidation preference means that when the company is sold or wound up, the investor is paid first, before the founders and other shareholders. With a 1x non-participating preference, the investor takes either their money back or their percentage of the proceeds, whichever is higher, but not both. A participating preference lets them take their money back and then share in the rest, which is why founders resist it. 1x non-participating is the market standard in India.

Anti-dilution protection gives an investor extra shares if the company later sells shares at a lower price than the investor paid (a down round). The standard formula in India and globally is broad-based weighted average, which adjusts the investor's price in proportion to how much was raised at the lower price. Full ratchet, which resets the investor's price to the new lower price regardless of the size of the down round, is investor-heavy and should be refused or tightly limited.

It means the employee option pool is created before the investor's money comes in and counted inside the headline valuation, so the founders and earlier investors bear all of its dilution. With a pre-money valuation of ₹80 crore and a 10 percent pool on a ₹100 crore post-money, the pool is worth ₹10 crore and the founders' effective pre-money is ₹70 crore. Negotiate the pool size against an 18-month hiring plan, or ask for it to be created post-money.

Reserved matters (also called affirmative vote matters, protective provisions or veto rights) are decisions the company cannot take without the investor's written consent, whatever the shareholding. Standard items protect the investment: issuing shares, changing the Articles, selling the company, large borrowing, related-party deals and changes to the business. A list of 15 to 25 structural items is normal at Series A; a list that reaches into hiring, salaries and routine spending is not.

A drag-along lets a defined majority of shareholders force everyone else, founders included, to sell their shares to a buyer on the same terms, so that a buyer can acquire 100 percent of the company. It is fair when it applies only after a waiting period (usually four or five years without an exit), needs board approval or founder consent, sets a floor price, and requires a bona fide third-party buyer. A drag the investor alone can trigger from day one with no floor is a red flag.

Founder shares are usually subject to reverse vesting: the company can take back unvested shares if a founder leaves early. A standard schedule is four years with a one-year cliff, with credit for time already served. A good leaver (death, disability, removal without cause) keeps vested shares and receives fair value for unvested ones; a bad leaver (fraud, serious breach) loses unvested shares at face value. Double-trigger acceleration vests everything if the company is sold and the founder is then pushed out.

All three let an investor put money in now and receive shares at the next priced round, usually at a discount or a valuation cap. A convertible note is a loan that can be issued only by DPIIT-recognised startups, with a minimum of ₹25 lakh per investor and conversion within 10 years. A US-style SAFE does not fit Indian company law, so Indian investors use the iSAFE, which issues compulsorily convertible preference shares today whose economics are settled at the next round, or compulsorily convertible debentures.

Six to ten weeks is typical for a Series A in India: one to four weeks of due diligence, two to four weeks of drafting and negotiating the definitive agreements, then board and shareholder approvals, a valuation report and the private placement offer letter before the investor pays. The company can only use the money after allotting the shares and filing the return of allotment (Form PAS-3), and a foreign investment must be reported in Form FC-GPR within 30 days.

A foreign investor can hold a put option on equity shares, CCPS or CCDs, but only after a minimum lock-in of one year and only at a price that does not exceed fair value at the time of exit. Indian exchange control rules do not allow a non-resident investor an assured return, so a clause promising a fixed IRR on exit is unenforceable against the company and risky for the founders who sign it.

No. The tax on shares issued above fair value (Section 56(2)(viib) of the Income-tax Act 1961) was abolished for all investors from assessment year 2025-26, so shares issued on or after 1 April 2024 carry no angel tax. A valuation report is still needed under company law for a preferential allotment and under FEMA for a foreign investor, and assessments for earlier years can still be reopened.