Before the lawyers draft a hundred-page shareholders’ agreement, before the money moves, there is a shorter document that decides almost everything: the term sheet. Usually five to ten pages, it lays out the price of the round and the rights the investor gets in exchange. Founders often treat it as a celebratory milestone – the deal is done! – when they should treat it as the moment of maximum leverage they will ever have. Once signed, renegotiating is nearly impossible. Here are the clauses that matter and what each one really costs.

Valuation and the option pool shuffle

The headline number is the valuation – typically quoted pre-money – which sets what percentage the investor’s cheque buys. But founders must watch the option pool shuffle: investors often require the ESOP pool, say 10 per cent, to be created before their investment, which means the dilution comes entirely from existing shareholders rather than being shared. A 100-crore pre-money valuation with a 10 per cent pre-money option pool is economically closer to a 90-crore valuation for founders. Always model the fully diluted maths, and negotiate whether the pool is created pre- or post-money.

Liquidation preference: who gets paid first

This is the most financially consequential clause after valuation. A 1x liquidation preference means that in any exit – a sale, and sometimes an IPO – investors get their money back before founders and employees see a rupee. With a participating preference, investors get their money back and then share in the remaining proceeds – a double dip that founders should resist; the market standard is non-participating. Multiples above 1x are punitive and rare in competitive rounds. The clause that looks like boilerplate in a success scenario becomes everything in a mediocre exit: in a sale at a disappointing price, the preference stack can leave founders with nothing after years of work.

Anti-dilution, pro-rata and pay-to-play

Anti-dilution protects investors if a future round happens at a lower valuation: a broad-based weighted average adjustment is the founder-friendly standard, while full-ratchet anti-dilution – which reprices all their shares to the new low price – is harsh and worth fighting. Pro-rata rights let investors maintain their ownership by investing in future rounds; standard and usually fine. Pay-to-play provisions penalise investors who do not participate in down rounds by converting their preferred shares to common stock – founders generally like these, as they keep investors committed. Together these clauses determine how pain is shared when things go wrong, which is exactly when you will be glad you read them.

Control: board, vetoes and founder terms

Money buys influence, and the term sheet prices it precisely. Investors typically take a board seat and negotiate protective provisions – veto rights over selling the company, raising debt, changing the business, or issuing senior shares. These are standard, but their scope is negotiable; a veto list that covers everyday operations will strangle the company. Founder vesting is another key clause: investors often require founders’ own shares to vest over four years, so a departing founder leaves unvested equity behind – reasonable, but negotiate the terms. Also watch drag-along rights, which can force minority shareholders to join a sale, and the fine print on information rights and non-competes.

How to approach the term sheet

Get a good startup lawyer before you sign, not after – the few lakh rupees in fees is the cheapest insurance in the deal. Negotiate economics and control together rather than fixating on valuation alone; a slightly lower valuation with clean terms beats a high one with a participating preference and full ratchet. And remember that the term sheet, while mostly non-binding except for confidentiality, exclusivity and expenses, sets the moral terms of the deal – deviating from it later poisons the relationship. The best founders treat the term sheet as the beginning of a partnership, not the end of a negotiation.

FAQs

Is a term sheet legally binding?

Mostly no – the commercial terms are non-binding. But confidentiality, exclusivity (no-shop) and expense clauses usually are binding, so you cannot freely shop the deal during the exclusivity period.

What is a no-shop clause?

An exclusivity period, typically 30 to 60 days, during which you agree not to solicit other investment offers while the investor completes due diligence.

Should founders negotiate every clause?

Prioritise: valuation, liquidation preference, anti-dilution breadth, board control and founder vesting. Fighting over minor clauses burns goodwill you will need later.

Compiled by the Khabar 24h Editorial Desk from publicly available sources.