A funding headline can hide a complicated rights package. Economics can cover valuation, investment amount, security, dilution, liquidation preference, anti-dilution, and the option pool, while control and process can bring board rights, reserved matters, founder vesting, information, transfer, exit, exclusivity, confidentiality, costs, and closing conditions. Some provisions are intended as commercial outlines. Others can be binding immediately. The document also becomes the instruction sheet for due diligence and definitive agreements, so ambiguity does not stay small. Founders should turn those provisions into questions and a working model before signing. The corporate, securities, FEMA, tax, competition, sector, and enforceability position depends on the parties and structure. Independent counsel, tax advisers, and valuation professionals should review current law and the complete term sheet.
Model ownership before arguing valuation
Put the investment into an issued and fully diluted cap table. Show pre-money and post-money ownership, the option pool before and after the round, conversion of existing instruments, promised grants, and any secondary sale. Then run at least two later events, such as another round and a lower-price round. Definitions decide whether the same headline valuation produces different founder dilution. Ask which securities count in the denominator, who bears a pool increase, and whether any warrant, advisory grant, or convertible has been omitted. Reconcile the model with company records and prior contracts. If the investor is foreign, add instrument eligibility, pricing, sector, approval, and reporting questions rather than treating the cap table as complete. Finance should own the model. Have independent counsel and tax advisers test the legal and tax assumptions. Do not sign until the parties are looking at the same ownership outcome.
- Issued and fully diluted ownership
- Pre-money and post-money calculations
- Option pool timing and dilution
- Existing convertibles and promised grants
- Later-round scenarios
Translate preference into exit numbers
Liquidation preference, participation, conversion, dividends, anti-dilution, and seniority can sound technical until the company is sold. Build simple exit tables at several sale values and show what each class receives. Include a down round and a modest exit, not only the optimistic case. Check how a preference interacts with conversion, accrued amounts, multiple investor classes, employee options, debt, and transaction costs. Anti-dilution language needs a formula and exceptions that fit ordinary employee grants, strategic issuances, and approved acquisitions. A term that seems common can have a strong result under this cap table. Ask which business event triggers the right and whether the definition reaches a merger, asset sale, control transfer, or winding up. Independent counsel should confirm how the proposed security and rights can be created under current company and foreign-investment rules.
- Exit waterfall at several values
- Conversion and participation mechanics
- Seniority across investor classes
- Anti-dilution formula and exceptions
- Events treated as a liquidation
Price control and founder obligations
Board seats, observers, quorum, vetoes, information rights, budgets, transfer restrictions, founder vesting, exclusivity, non-compete language, and exit cooperation can change how the company is run. Make a decision matrix for the day after closing. Which ordinary actions still belong to management? Which need board approval, investor consent, or a shareholder vote? Test hiring, pricing, debt, a new office, litigation settlement, related-party work, a business pivot, and the next financing. Founder obligations should be specific about role, time, vesting, departure, and intellectual property. A broad restriction may reach outside what the investment needs or current law supports. Each founder should understand where personal interests differ from the company or other founders and may need separate advice. Governance terms should fit the articles and later shareholders' agreement, with a process that can function when the investor contact is unavailable.
- Post-closing decision matrix
- Board, observer, and quorum rights
- Reserved matters with response process
- Founder role and vesting changes
- Current review of restrictive terms
Read the process clauses as live obligations
Confidentiality, exclusivity, no-shop, access to information, costs, governing law, dispute resolution, and publicity may bind before the investment closes. Mark each binding clause, its start, end, extension, and exit route. A long exclusivity period without diligence milestones can prevent the company from speaking to alternatives while the investor has little urgency. Conditions precedent should be divided into matters the company controls, third-party approvals, investor actions, and regulatory steps. Put realistic dates and owners against them. Decide who pays counsel, diligence, valuation, filing, and transaction costs if the deal closes or fails. The term sheet should also say what happens if diligence changes the price or rights. Obtain advice before signing, not after. A short document can create a serious negotiating position even where much of the investment remains subject to definitive agreements.
- Binding and non-binding provisions marked
- Exclusivity period and milestones
- Conditions grouped by responsible party
- Transaction-cost treatment
- Route if diligence changes the deal
Primary sources and further reading
- India Code: Companies Act, 2013
- RBI: Master Direction on Foreign Investment in India
- Ministry of Corporate Affairs: PAS-3 filing instructions for allotments and private placements
Rules and procedures change. Check the current official source and obtain advice for the facts of your matter.