Term sheet is non-binding document outlining investment terms: Valuation, amount raised, ownership percentage, liquidation preferences, board seats, anti-dilution protection, and investor rights. Negotiated between founder and investor before final legal agreements. Critical to understand—impacts ownership and control.
Term sheet explained: PURPOSE: Summarizes key investment terms before expensive legal work begins. Not legally binding (except exclusivity, confidentiality). Once signed, lawyers draft formal SHA (Shareholders Agreement). KEY TERMS: (1) VALUATION & OWNERSHIP: Pre-money valuation: Company value before investment. Example: ₹20 crore pre-money. Investment amount: ₹5 crore. Post-money valuation: ₹25 crore. Investor ownership: ₹5/₹25 = 20%. (2) LIQUIDATION PREFERENCE: Determines payout order in exit/shutdown. 1x non-participating (standard): Investor gets back investment OR ownership %, whichever is higher. Example: Invested ₹5 crore, company sells for ₹10 crore, owns 20%. Gets ₹5 crore (investment) OR ₹2 crore (20% of ₹10cr), takes ₹5cr. Remaining ₹5cr to founders. 1x participating (investor-friendly): Investor gets investment PLUS ownership %. Example: Gets ₹5cr back + 20% of remaining ₹5cr = ₹6cr total. Founders get ₹4cr. AVOID participating preferences—very founder-unfriendly. (3) ANTI-DILUTION PROTECTION: Protects investors if next round is down round (lower valuation). Full ratchet (investor-friendly): Re-prices earlier shares to new lower price. Weighted average (balanced): Adjusts partially based on round size. Avoid full ratchet—punishes founders heavily in down rounds. (4) BOARD SEATS: Who controls company? Common split: 1 founder seat, 1 investor seat, 1 independent. Founders should maintain board control until later stages. (5) VOTING RIGHTS: What requires investor approval? Standard: Sale of company, new funding rounds, budgets >₹X. Avoid: Giving investors approval over hiring, salaries, product decisions (operational control). (6) VESTING: Founder shares vest over 4 years (25%/year) to ensure commitment. (7) DRAG-ALONG: If majority wants to sell, minority must agree (prevents small shareholders blocking exit). (8) PRO-RATA RIGHTS: Investors can invest in future rounds to maintain ownership %. NEGOTIATION: Valuation matters, but terms matter more. ₹50 crore valuation with bad terms (participating liquidation, full ratchet) < ₹40 crore with standard terms. Red flags: >50% investor ownership in early rounds, Participating liquidation preferences, Founder vesting <4 years with no acceleration, Investors control board, Operational approvals (hiring, spending). Get lawyer to review term sheet before signing!
Good term sheet: ₹20cr pre-money, ₹5cr raise, 20% to investor. 1x non-participating liquidation, weighted average anti-dilution, 5-person board (2 founders, 1 investor, 2 independent).
Bad term sheet: ₹10cr pre-money, ₹5cr raise, 33% to investor. 2x participating liquidation, full ratchet, 3-person board (1 founder, 2 investors). Founders lose control, bad economics.
Real example: Startup took ₹5cr at ₹20cr valuation with 2x participating. Company sold for ₹50cr. Investors got: ₹5cr × 2 = ₹10cr + 20% of ₹40cr = ₹18cr. Founders got ₹32cr (should have been ₹40cr with standard terms).
No (except exclusivity and confidentiality clauses). But once signed, both parties expected to proceed to final SHA. Walking away damages relationship/reputation.
1x non-participating is standard. Investor gets back investment OR ownership %, whichever is higher. Avoid participating (investor gets both) or >1x multiples.
1-2 weeks typical. Valuation negotiated first (2-3 days), then terms (5-10 days). Don't rush—bad terms haunt you forever. Get lawyer involved.
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