A term sheet is not a friendly summary of the deal. It is the investor’s opening move in deciding who will control your company when things go well, when they go badly, and when you disagree. The biggest term sheet red flags are not always the dramatic ones. A low valuation is visible. A hidden veto right, broad founder indemnity, or aggressive liquidation preference can cost you far more later.
If you are raising a seed or pre-Series A round in India, read every term against three questions: how much cash reaches the company, who controls decisions, and what happens to your ownership in a mediocre exit. If you cannot answer those questions in rupees and percentages, you are not ready to sign.
What is a term sheet?
A term sheet records the main commercial terms of an investment before lawyers draft the definitive documents, usually the share subscription and shareholders’ agreements. It may be labelled “non-binding”, but that does not make it harmless. Confidentiality, exclusivity, expenses, governing law and dispute provisions may still bind you.
In India, the final documents also have to work with the Companies Act, foreign investment rules, tax treatment, FEMA requirements where an overseas investor is involved, and the company’s existing constitutional documents. A term sheet that looks acceptable in isolation can become a problem when lawyers translate it into an SSHA.
Your job is not to win every negotiation. Your job is to avoid accepting terms that make the next round, a founder exit, or a difficult board decision unnecessarily painful.
Term sheet red flags: the clauses that deserve immediate attention
1. A vague valuation that hides the dilution
“₹20 crore valuation” tells you almost nothing until you know whether it is pre-money or post-money, and what sits in the fully diluted share capital.
Suppose an investor puts ₹5 crore into your company.
| Term | Pre-money valuation | Post-money valuation | Investor ownership |
|---|---|---|---|
| Investor invests ₹5 crore | ₹20 crore | ₹25 crore | 20% |
| Investor invests ₹5 crore | ₹25 crore | ₹30 crore | 16.67% |
That difference is not a drafting detail. It changes founder ownership immediately.
Then ask whether the option pool is included before or after the investment. A 10% employee option pool created before the round is usually borne by the existing shareholders. Created after the round, the dilution is shared by all shareholders. Investors often prefer the first structure because it gives them their negotiated percentage after the pool has already diluted you.
Ask your lawyer to show you a cap table with:
- Current founder and investor ownership.
- Existing ESOPs and unissued options.
- The new option pool.
- The new investor’s shares.
- Any convertible notes, SAFE-like instruments or warrants.
- Ownership after the next round at several possible valuations.
Do not negotiate valuation until you know the denominator. A high headline valuation with a large pre-money option pool can be worse than a lower valuation with clean mechanics.
2. Liquidation preference that makes an ordinary exit unattractive
A liquidation preference decides who gets paid first when the company is sold, wound up, or sometimes undergoes another “liquidation event”. In a normal Indian startup exit, this clause matters far more than founders expect.
A standard early-stage position is often 1x non-participating preference. The investor gets either their original investment back or their pro-rata share of the proceeds, whichever is higher.
The dangerous version is participating preference. The investor first takes their preference and then participates again in the remaining proceeds. A multiple above 1x makes the economics harsher still.
Rule of thumb: At seed stage, fight hardest against participating preference, multiple liquidation preferences, and preference that compounds with a guaranteed return. These terms can turn a respectable exit into a disappointing founder outcome.
Example: an investor puts ₹5 crore for 20% of the company.
- With 1x non-participating preference and a ₹10 crore exit, the investor chooses ₹5 crore rather than 20% of ₹10 crore. Founders and other shareholders split the remaining ₹5 crore.
- With 1x participating preference, the investor takes ₹5 crore first and then receives 20% of the remaining ₹5 crore. The investor gets ₹6 crore; everyone else shares ₹4 crore.
At a large exit, the difference may be less painful. At a ₹10 crore, ₹20 crore or ₹30 crore exit, it can decide whether founders receive anything meaningful.
Also check whether “liquidation event” includes a merger, asset sale, change in control, sale of substantially all business assets, or a secondary transaction. Broad drafting gives the investor more opportunities to trigger preference.
3. Anti-dilution protection that punishes you for a down round
Anti-dilution protection adjusts an investor’s effective conversion price if you issue shares later at a lower price. Some protection is common. The formula matters.
Broad-based weighted-average anti-dilution is generally less severe because it considers the size of the new issue and the existing capitalisation. Full-ratchet anti-dilution resets the earlier investor’s price to the new lower price, regardless of how small the down round is.
Suppose an investor bought shares at ₹100 each. You later issue a small emergency round at ₹40. A full-ratchet clause treats the earlier investor as if they had also invested at ₹40. Their share count can jump sharply, diluting founders and later investors.
Do not accept vague language such as “customary anti-dilution protection” and assume the lawyers will sort it out. Put the formula in the term sheet. State the exclusions too:
- ESOP grants approved within the agreed pool.
- Shares issued in a stock split or bonus issue.
- Strategic issuances approved by the board.
- Shares issued as acquisition consideration.
- Convertible instruments already disclosed.
A down round is already painful. A full-ratchet clause can make recovery harder by transferring even more ownership to the investor who funded the earlier round.
4. Investor veto rights disguised as “reserved matters”
Board seats get attention. Reserved matters often do more damage quietly.
A reserved-matters list gives an investor consent rights over specified actions. Some protection is reasonable: issuing new shares, changing the charter, selling the company, or taking on major debt. The red flag is a list so broad that you need investor permission to run the business.
Watch for consent rights over:
- Hiring or removing senior employees.
- Changing salaries or ESOP grants.
- Entering ordinary-course contracts.
- Opening or closing bank accounts.
- Changing pricing or business lines.
- Spending above a low threshold.
- Taking routine working-capital debt.
- Settling ordinary litigation.
- Making acquisitions of immaterial size.
Thresholds must match your stage. A ₹25 lakh spending approval limit may sound sensible when your monthly burn is ₹10 lakh. It becomes absurd when the company reaches ₹2 crore in monthly revenue and signs normal supplier contracts above that amount.
Insist on objective thresholds, a time limit for responses, and a deemed approval mechanism if the investor does not respond within a defined number of business days. Otherwise, silence becomes a veto.
5. A board structure that leaves you outnumbered
At seed stage, a board with two investor directors, one founder director and one “independent” chosen by the investors is not balanced. It is investor control with polite packaging.
Check:
- How many directors each side appoints.
- Whether the investor can appoint an observer who receives all board information.
- Who appoints the independent director.
- Whether the chairperson has a casting vote.
- Whether quorum requires an investor director to be present.
- What happens if an investor stops holding a minimum percentage.
A casting vote for the chairperson is especially dangerous. If the chair is investor-appointed, the board can become a control mechanism even when the investor owns a minority stake.
Board rights should fall away when the investor’s ownership drops below an agreed threshold. Otherwise, an investor who owns 3% after several rounds may still control decisions meant for a 20% shareholder.
6. Founder lock-in, vesting and bad-leaver language
Investors want founders to remain committed. That is fair. The red flag is a clause that treats resignation, illness, disagreement, or termination without process as founder misconduct.
Founder vesting may include a four-year period with a one-year cliff, but do not accept the phrase without understanding the starting point. Is vesting reset on this round? Do you receive credit for the years already spent building the company? Is there acceleration if the company is sold?
Read “good leaver” and “bad leaver” definitions line by line.
A bad-leaver clause may allow the company or investors to buy your vested shares at nominal value. That is an extreme outcome. It should apply only to serious misconduct, fraud, theft, or wilful breach, after a fair process. It should not apply because you resign after a board dispute or because investors decide you are no longer the right operator.
Ask for:
- Credit for prior service.
- Single-trigger or double-trigger acceleration on a change of control.
- A clear cure period for alleged breaches.
- Independent determination of misconduct.
- Fair-market-value treatment for a founder who leaves without cause.
Your company is not a job where a new manager can fire you and confiscate the value you created.
7. Drag-along rights without safeguards
Drag-along rights allow a required majority of shareholders to force other shareholders to sell if a buyer acquires the company. Without drag rights, one small shareholder can block an exit. That problem is real.
The problem is giving a single investor, or a small investor group, the power to drag everyone into a sale on terms they choose.
Check the trigger. It should usually require approval from a meaningful shareholder majority, not merely one preferred investor. Check whether the drag applies equally and whether your liability is several rather than joint. You should not provide unlimited warranties for the entire company when your ownership is 12%.
Also check whether the investor can sell its shares to a buyer while forcing you to provide personal warranties, non-compete obligations or escrow commitments that were never agreed.
8. Tag-along and transfer restrictions that trap your liquidity
Tag-along rights protect minority shareholders by allowing them to sell alongside a shareholder who sells control. They are usually sensible.
Transfer restrictions become a problem when they make every secondary sale slow and uncertain. Look for rights of first refusal, rights of first offer, investor consent, founder lock-ins and broad restrictions on transfers to family trusts or holding companies.
If you expect to sell a small portion of your shares to fund personal expenses, clarify the process now. A founder who has taken a modest salary for years may need liquidity. Treating every secondary sale as a sign of disloyalty is poor governance.
9. Redemption rights that create a cash obligation
Redemption rights allow an investor to ask the company, or sometimes the founders, to buy back its shares after a specified period. In a capital-starved startup, that can become an impossible demand.
Be careful with language requiring redemption after three, five or seven years at the original investment plus a fixed return. The company may not have distributable cash. Indian company law also places limits on buybacks, capital reduction and redemption structures. A term sheet cannot override those requirements.
Never agree to a personal founder obligation to fund redemption from your own pocket. If the company cannot pay, the remedy should not quietly become your personal debt.
10. Founder warranties and indemnities that are far too broad
Investors need protection against fraud and material misrepresentation. They do not need an unlimited insurance policy from a first-time founder.
Red flags include:
- Unlimited liability.
- No financial cap on indemnity.
- No time limit for claims.
- Liability for matters outside your knowledge.
- Joint and several liability among founders.
- Personal liability for company obligations.
- Claims for ordinary business forecasts that did not come true.
Warranties should be accurate, qualified by disclosure, and limited to matters you can reasonably know. Indemnities should have caps, baskets, survival periods and exclusions. Fraud and wilful misconduct may sit outside the cap, but ordinary warranty claims should not.
Build a disclosure schedule. If the company has received a tax notice, used a contractor without a perfect agreement, or has a customer dispute, disclose it. Surprises are expensive. A disclosed problem is usually manageable; an undisclosed problem becomes a trust issue.
11. Information rights that expose sensitive business data
Investors need monthly reporting, financial statements, budgets and board information. But information rights should not allow sensitive customer data, employee records or trade secrets to circulate without controls.
Ask who can receive the information, whether advisers are bound by confidentiality, and whether the investor can share it with a fund’s portfolio companies. A strategic investor may be a competitor or may invest in one later.
Set practical reporting obligations. A seed company may not be able to produce audited monthly accounts. Agree on monthly management accounts, key metrics, cash position and a quarterly board pack instead of promising a reporting machine you cannot maintain.
12. Exclusivity and no-shop periods that destroy your negotiating position
Exclusivity is often requested after an investor has spent time on diligence. A short, defined period can be reasonable. A 90-day no-shop clause before definitive documents are settled is not.
During exclusivity, the investor can delay while you lose other options. If the round collapses, you may have burned a quarter of your runway and damaged relationships with other funds.
Limit exclusivity to 15-30 days where possible. Tie it to clear milestones: diligence completion, draft documents, approvals and funds transfer. Include an automatic end date if the investor misses its own deadlines.
13. “Subject to definitive documents” with no agreed boundaries
This phrase is normal. It becomes dangerous when the term sheet leaves key terms open and the investor later introduces them in the SSHA.
Write down the full economic and control package now:
- Security type and price.
- Pre-money or post-money valuation.
- Option pool treatment.
- Liquidation preference.
- Anti-dilution formula.
- Board composition.
- Reserved matters.
- Founder vesting and leaver terms.
- Transfer rights.
- ESOP terms.
- Conditions precedent.
If a term matters enough to affect control or money, it belongs in the term sheet. “We will work it out with counsel” is not a negotiation strategy.
The terms founders ignore because they are desperate to close
Founders focus on valuation because it feels like a score. Investors focus on downside protection because they have seen more failure than you have.
Three smaller-looking terms deserve attention.
Conditions precedent
These are the tasks you must complete before funds arrive. Some are routine: board approvals, updated statutory registers and execution of documents. Others can become moving targets.
Ask for a closed list. Do not accept a condition requiring the investor to be “satisfied” with any matter. Replace subjective approval with objective documents and deadlines.
Use of proceeds
A budget can reassure an investor. A rigid use-of-proceeds clause can prevent you from responding to reality. If you discover that distribution works better than paid acquisition, you should not need permission to move ₹30 lakh between sensible business activities.
Agree on broad categories and a materiality threshold. Do not promise a revenue plan in the term sheet as if it were a warranty.
Legal fees and transaction expenses
Clarify whose lawyers are being paid, whether there is a cap, and what happens if the deal does not close. A founder can end up paying a large investor-side legal bill after a failed transaction if the clause is open-ended.
How to read a term sheet this week
Do not read it from the first page to the last and hope the meaning emerges. Use a mechanical review.
- Build the cap table. Show ownership before and after the round, including the ESOP pool and all convertibles.
- Model three exits. Use a ₹10 crore, ₹50 crore and ₹200 crore exit. Apply liquidation preference, participation and any debt before calculating founder proceeds.
- Mark every consent right. Separate decisions requiring board approval from decisions requiring a specific investor’s approval.
- Run a down-round model. Issue a hypothetical round at 50% of today’s price. See how anti-dilution changes ownership.
- Read founder clauses separately. Review vesting, leaver provisions, non-compete language, indemnities and personal guarantees without being distracted by valuation.
- Set expiry dates. Put deadlines on exclusivity, conditions precedent and investor responses.
- Get an independent lawyer. The investor’s counsel does not represent you. Use a startup lawyer who has negotiated Indian venture documents, not only a general corporate practitioner.
Use a simple red-amber-green sheet. Red means you will not sign it. Amber means you need a clear cap, threshold or sunset. Green means the term is acceptable. This makes the conversation less emotional and prevents a lawyer’s markup from burying the commercial issues.
For a second pass, review your financial model and assumptions alongside the term sheet. Our guide on questions and red flags in financials is useful here: the deal terms and your cash plan must tell the same story.
What a fair seed term sheet usually looks like
There is no universal Indian template. A consumer startup raising ₹2 crore and a B2B manufacturing company raising ₹15 crore will not have identical terms. Still, a founder-friendly early-stage package normally has these features:
| Area | Reasonable starting position | Red flag |
|---|---|---|
| Liquidation preference | 1x non-participating | Participating, multiple, or compounded preference |
| Anti-dilution | Broad-based weighted average | Full ratchet with few exclusions |
| Board | Balanced representation with clear thresholds | Investor majority or investor-controlled casting vote |
| Reserved matters | Major structural decisions and sensible thresholds | Routine hiring, pricing and spending vetoes |
| Founder vesting | Credit for prior service and fair leaver treatment | Reset vesting and nominal-value forfeiture |
| Indemnity | Cap, time limit, disclosure qualification | Unlimited personal liability |
| Exclusivity | Short, milestone-based period | Long no-shop with no investor deadline |
“Market standard” is not a magic phrase. A term can be common in late-stage deals and still be wrong for your seed round. Ask: standard for whom, at what stage, and with what bargaining power?
Do not let a higher valuation win the negotiation
Suppose Fund A offers ₹4 crore at a ₹16 crore pre-money valuation with clean 1x non-participating preference. Fund B offers ₹4 crore at a ₹20 crore pre-money valuation but asks for participating preference, a board majority, full-ratchet anti-dilution and founder redemption obligations.
Fund B has the higher headline valuation. It may be the worse deal by a wide margin.
Also assess the investor’s behaviour during the process. Did they explain the terms clearly? Did they change commercial points after you agreed? Do they respond quickly when the company faces a problem? A difficult term sheet often predicts a difficult shareholder relationship.
The investor will sit on your cap table through the next round, a down round, a founder disagreement and a possible exit. You are not only selling shares. You are choosing a business partner with legal rights.
If you are still deciding what ownership to sell, read How Much Should You Charge? for a related founder-side view on pricing and value. The same discipline applies here: do not confuse a number with a sound commercial deal.
Bottom line
The worst term sheet red flag is not always an aggressive clause. It is a founder who signs without modelling what the clause does.
Before you sign, calculate three outcomes: a modest exit, a down round and a founder departure. If the investor receives most of the money in the modest exit, gains control after the down round, or can strip your vested shares after a disagreement, the valuation is irrelevant.
Raise from an investor whose terms let you build, fail honestly, recover, and still own a meaningful share of the outcome. A clean ₹15 crore pre-money deal is better than a ₹25 crore deal that turns your company into a controlled asset.
Malpani Ventures works with Indian founders who want hard questions answered before the documents are signed, not after the damage is done.
FAQs
What are the biggest term sheet red flags for Indian founders?
Focus first on participating or multiple liquidation preference, full-ratchet anti-dilution, investor-controlled board rights, broad reserved matters, founder bad-leaver clauses, unlimited indemnity, redemption obligations and long exclusivity periods. Then model their financial effect.
Is a term sheet legally binding in India?
Usually, the commercial terms are stated to be non-binding, while clauses such as confidentiality, exclusivity, expenses, governing law and dispute resolution may bind the parties. Read the binding provisions carefully and have an Indian startup lawyer review them.
What is a good liquidation preference for a seed round?
A common founder-friendly position is 1x non-participating preference. The investor receives either the original investment or its pro-rata share of exit proceeds, not both. Any participation, multiple or compounded return needs strong justification.
What is the difference between pre-money and post-money valuation?
Pre-money valuation is the company’s value before the new investment. Post-money valuation equals pre-money valuation plus the investment. If ₹5 crore is invested at a ₹20 crore pre-money valuation, the post-money valuation is ₹25 crore and the new investor owns 20%, before other dilution effects.
Should founders accept full-ratchet anti-dilution?
Usually not in an early-stage Indian round. Full-ratchet protection can give an earlier investor a large ownership increase after a small down-round issuance. Ask for broad-based weighted-average protection with clear exclusions instead.
How long should term sheet exclusivity last?
Keep it short and tied to milestones. A 15-30 day period is a reasonable starting point for many seed transactions, though the right period depends on diligence and approvals. It should expire automatically if the investor misses agreed deadlines.
Can an investor force a founder to sell shares?
Drag-along rights can force minority shareholders to participate in an approved sale. The trigger, voting threshold, liability allocation and personal warranties matter. A single investor should not normally have unchecked power to sell the whole company on terms it alone chooses.
Do I need a lawyer to review a term sheet?
Yes. Use an independent lawyer experienced in Indian venture financings. The investor’s lawyer protects the investor. Your lawyer should model dilution, review the SSHA and SHA implications, and identify provisions that create control or personal liability.