A term sheet is short, but it sets the rules for every round that follows. Most of it is standard. A few clauses decide how much of your company you really keep and how much control you give away. Here is how to read one.
Valuation and the instrument
Check whether the valuation is pre-money (before the new money comes in) or post-money (after). The same number means different ownership depending on which it is.
Most institutional seed rounds in India use compulsorily convertible preference shares (CCPS). They convert into equity shares later and carry the investor rights set out in the shareholders’ agreement. Early rounds may also use convertible notes or similar instruments that convert at the next priced round, usually at a discount or subject to a valuation cap.
Liquidation preference
This decides who gets paid first if the company is sold or wound up. A 1x non-participating preference is the most common at seed: the investor gets their money back or converts and shares pro rata, whichever is higher. Look carefully at anything above 1x, or at “participating” preferences, where the investor takes their money back and then shares in the rest as well.
Anti-dilution
This protects investors if a later round is priced lower. Broad-based weighted average protection is the market norm. Full ratchet protection is far harsher on founders and is worth negotiating hard against.
ESOP pool
Investors often ask for an employee stock option pool to be created before the round. If the pool is carved out of the pre-money valuation, the dilution falls entirely on existing shareholders. Size the pool to your real hiring plan for the next 18–24 months, not a generic percentage.
Board and information rights
- Board seat or observer. At seed, an observer seat is often enough. Keep the board small and founder-led.
- Information rights. Monthly or quarterly updates and annual audited accounts are normal. Agree a format you can sustain.
Reserved matters
These are decisions that need investor consent: issuing new shares, changing the business, large borrowings, related-party transactions, selling the company. A reasonable list protects the investor’s capital. An overly long list can slow down routine decisions, so read it as an operating document, not boilerplate.
Founder vesting and exits
- Founder vesting. Investors may ask that part of the founders’ shares vest over time. This also protects co-founders from each other if someone leaves early.
- Right of first refusal and tag-along. Standard ways for investors to buy shares a founder sells, or sell alongside them.
- Drag-along. Lets a majority force a sale. Check the thresholds and any minimum price.
Before you sign
A term sheet is usually non-binding on the commercial terms but binding on confidentiality and exclusivity. Agree the main points in plain language, have a lawyer who does startup financings review it, and make sure you understand your ownership after the round and after the next one. Our preference at CK Grow LLP is simple, standard terms, so that founders can raise their next round without untangling the last one.