What a term sheet actually says

A term sheet is a short document — often two or three pages — setting out the deal an investor proposes. Most of it is deliberately non-binding: it is an agreement to try to agree, not the agreement itself. A handful of clauses usually do bind you the moment you sign, whether or not the money ever arrives.

1. What binds, and what does not

Read the binding clause first, because it is the only part you are certain to be held to. Typically three things survive even if the deal dies:

• Confidentiality — covering the terms and often the fact of the discussion itself.
• Exclusivity, or no‑shop — a period during which you may not talk to other investors. Thirty to sixty days is ordinary; ninety at this size is long, and if the investor then walks you have lost a quarter of your runway and your momentum.
• Costs — who pays the legal bills, and whether you pay theirs if the deal does not close.

2. Valuation, and what is counted inside it

Pre-money is what the business is agreed to be worth before the new money. Post-money is pre-money plus the round. The investor's stake is the round divided by the post-money, so a ₹5 Crore cheque at a ₹20 Crore pre-money buys twenty per cent of a ₹25 Crore company.

The trap is not the headline number, it is what the pre-money is deemed to contain. Convertible notes from earlier, unissued but promised shares, an advisor's warrant — if these convert inside the pre-money, they dilute you and not the new investor. Ask for a fully diluted, post-closing cap table before you agree a price, not after.

3. The ESOP pool, which is the quietest clause in the document

Almost every term sheet requires an employee option pool, and almost every one places it inside the pre-money. That single word decides who pays for it.

Take a ₹20 Crore pre-money, a ₹5 Crore round, and a ten per cent post-closing pool. Without a pool, the founders keep eighty per cent. With a ten per cent pool carved out of the pre-money, the founders keep seventy, the pool holds ten, the investor still holds twenty. The investor's stake did not move. The founders funded the entire pool. Headline dilution was twenty per cent; real dilution was thirty.

It is a normal request and usually worth agreeing to — you will need the options. It is worth negotiating the size, though, against an actual hiring plan rather than a round number.

4. Liquidation preference

The preference decides who gets paid first when the company is sold, and it matters most in exactly the outcomes nobody models: the mediocre ones.

Say that investor put in ₹5 Crore for twenty per cent, and the company later sells for ₹20 Crore.

• 1× non-participating: the investor takes the higher of the ₹5 Crore preference or twenty per cent of ₹20 Crore, which is ₹4 Crore. They take ₹5 Crore. Everyone else shares ₹15 Crore.
• 1× participating: the investor takes the ₹5 Crore and then twenty per cent of the remaining ₹15 Crore. That is ₹8 Crore, and everyone else shares ₹12 Crore.

Same headline valuation, same cheque, ₹3 Crore of difference. A 1× non-participating preference is the ordinary, reasonable standard. Multiples above 1×, or participation without a cap, deserve a hard conversation.

5. Anti-dilution

Protection for the investor if a later round prices lower than theirs. Two forms, very far apart in effect:

• Broad-based weighted average adjusts their price partially, in proportion to how large and how much cheaper the down round was. This is conventional and most founders should accept it.
• Full ratchet re-prices all of their shares as if they had paid the new, lower price. In a bad round it can transfer a startling amount of the company from the founders to an investor who took none of the new risk.

6. Control: the board and the reserved matters

Board composition is the visible half. The reserved matters list — the decisions that need investor consent regardless of who holds what — is the half that governs the company day to day. Expect it to cover new debt, new share issues, selling the business, changing the business, senior hires and founder compensation.

A tightly drawn list is normal and fine. A list that requires consent to ordinary operating decisions means you now run the company by committee, and no valuation compensates for that.

7. Who may sell, and when

• Right of first refusal — existing shareholders get first call on any shares you want to sell.
• Tag-along — if the founders sell, the investor can join the sale on the same terms.
• Drag-along — if a defined majority agrees to sell, the rest can be compelled to sell too, including you. Look closely at what counts as that majority.

What to do with all of this

Negotiate the clauses that compound — preference, anti-dilution, reserved matters, the pool — and be relaxed about the ones that do not. And read it with your own lawyer. Your advisor is not your counsel, and the investor's counsel certainly is not.