Term sheet explained: the key terms and what is binding

The economic terms

These decide how much of the company the round sells and who is paid what in a sale.

• Valuation and amount: how much is invested, and at what valuation. Check whether it is pre-money or post-money.
• Option pool: shares reserved for future employees, often created or topped up before the round and counted inside the pre-money.
• Liquidation preference: who is paid first in a sale, and how much. 1x non-participating is the common, founder-friendly term.
• Anti-dilution: how the investor's conversion price adjusts if a later round is priced lower. Broad-based weighted average is the usual standard.
• Pro-rata rights: the investor's right to buy into later rounds to keep its percentage.

The control terms

These decide who makes decisions after the money arrives, and they often matter longer than the price.

• Board seats: how many directors the investors, founders and independents appoint. At early stages founders commonly keep a majority.
• Protective provisions: decisions that need the investors' consent, such as issuing new shares, selling the company, changing share rights or taking on large debt. In India these are often called reserved or affirmative vote matters.
• Founder vesting: whether founders' shares vest again from the round, and what credit is given for time already worked.
• Information rights, transfer restrictions, and drag-along and tag-along rights.

What is binding and what is not

The investment itself, the valuation and almost every other term are normally non-binding: either side can still walk away, most often if due diligence turns up a problem. A few clauses usually are binding from signing:

• Exclusivity or no-shop: the company agrees not to seek or negotiate other offers for a set period.
• Confidentiality: neither side discloses the terms.
• Costs: who pays legal and diligence fees. Investors often ask the company to cover their legal costs up to a cap.
• Governing law, and when the binding clauses end.

Worked example: the option pool in the pre-money

Illustrative figures. A term sheet offers ₹10 crore at a ₹40 crore pre-money valuation, so the post-money is ₹50 crore and the investor owns ₹10 crore ÷ ₹50 crore = 20%. It also asks for an unallocated option pool equal to 10% of the post-money, created before the round.

The pool is 10% of ₹50 crore = ₹5 crore of value, and because it sits inside the pre-money, it comes out of the existing shareholders' part. The founders, who owned everything before the round, end up with 100% − 20% − 10% = 70% of the company, worth 70% × ₹50 crore = ₹35 crore. Their effective pre-money valuation is ₹35 crore, not the ₹40 crore headline.

Creating the pool after the round instead would dilute the investor too, which is why its size and timing are worth negotiating against a real hiring plan.

From term sheet to money in the bank

After signing, the investor runs legal, financial and tax due diligence while lawyers draft the final agreements. Closing commonly takes one to three months.

In Indian rounds, the term sheet is usually turned into two main documents. The share subscription agreement (SSA) covers the investment: how many shares are issued, at what price, the conditions to be met before the money is paid, and the company's and founders' representations and warranties. The shareholders' agreement (SHA) covers the ongoing relationship: board composition, reserved matters, transfer restrictions, information rights and exit rights. The articles of association are normally amended so these rights can be enforced, investors usually receive compulsorily convertible preference shares (CCPS), and investment from abroad must follow foreign-exchange pricing and reporting rules.

What to check before signing

• Whether the valuation is pre-money or post-money, and how the option pool and any SAFEs or notes are counted.
• The liquidation preference and anti-dilution formula, modelled at several exit values.
• The protective provisions: a short, specific list is workable; a long one gives investors a veto over everyday decisions.
• The length of the exclusivity period and the cap on investor legal costs.
• That a lawyer acting for the company, not the investor, reviews the term sheet and the final documents.