A term sheet is a non-binding document outlining key investment terms—valuation, ownership, voting rights, liquidation preferences. It's the negotiation framework before legal contracts, determining founder-investor relationship.
Term sheet is the negotiation battlefield. Once signed (typically non-binding except exclusivity), lawyers draft formal contracts (SHA, SSA). Key terms: (1) Valuation—pre-money valuation determines ownership. ₹10 crore pre-money + ₹2 crore investment = ₹12 crore post-money, investor gets 16.67%. (2) Liquidation preference—who gets paid first in exit. 1x non-participating is founder-friendly (investor gets investment back OR pro-rata share, whichever higher). 2x participating is investor-friendly (investment back PLUS pro-rata share). (3) Pro-rata rights—can investor maintain ownership % in future rounds? (4) Board composition—how many seats do investors get? (5) Anti-dilution—protection if company raises down round. Full ratchet (investor-friendly, aggressive) vs weighted average (founder-friendly, common). (6) Vesting—founder shares vest over 4 years (1-year cliff). Prevents founder from leaving early with full equity. (7) Drag-along rights—majority shareholders can force minority to sell in acquisition. Standard terms vs red flags: Standard = 1x non-participating liquidation, 4-year vesting, 1-2 board seats, weighted average anti-dilution. Red flags = >2x liquidation, participating preferred, full ratchet anti-dilution, majority board control early. Negotiate leverage comes from (1) multiple term sheets (competition), (2) strong traction (proof of value), (3) long runway (not desperate).
Peter Thiel's $500K seed had standard terms—no board seat, simple equity. Trusted Zuckerberg. Later VCs demanded board seats, preferences.
SoftBank's rescue term sheet had harsh terms: super-voting shares, Neumann ousted, 2x liquidation preference. Desperation = bad terms.
Accel invested $1M at $10M valuation, got 10%. Standard terms, founder-friendly. Trust enabled aggressive growth.
Term sheet determines power dynamics for life of company. Bad terms (participating preferred, investor board control, aggressive anti-dilution) can wipe out founder equity in mediocre exit. Example: Company sells for ₹50 crore. With 1x non-participating preference, founders get fair share. With 2x participating, investors get ₹40 crore (2x ₹20 crore investment), founders get scraps.
Yes, everything is negotiable if you have leverage (multiple offers, strong traction). Valuation, board seats, liquidation preference all negotiable. Just have alternatives.
Hire startup lawyer (₹1-2 lakhs well spent). They'll explain each clause, flag red flags, suggest counter-proposals. Never sign without legal review.
4-8 weeks. Term sheet signed → Due diligence → SHA/SSA drafting → Board approval → Wire transfer. Delays are common. Don't count on money until it's in bank.
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