Understanding Term Sheets: What Every Indian Founder Must Know

The first and most emotionally charged term in any sheet is the valuation. Pre-money valuation is what your company is worth before the investment. Post-money valuation is pre-money plus the investment amount.

If an investor says 'We are valuing your company at ₹4Cr pre-money and investing ₹1Cr,' your post-money valuation is ₹5Cr and the investor owns 20% (₹1Cr ÷ ₹5Cr). Simple arithmetic — but founders often confuse pre and post, and accidentally give away more equity than they intended.

At pre-seed stage in India, typical pre-money valuations range from ₹1.5Cr to ₹6Cr for first-time founders without revenue. At seed stage with early traction, ₹6Cr to ₹20Cr is common.

Liquidation preference determines who gets paid first if the company is sold, shuts down, or has a liquidity event. A 1× non-participating liquidation preference is standard and founder-friendly: the investor gets their money back first (1× their investment), and the remaining proceeds are distributed based on ownership percentage.

Watch out for participating preferred stock, sometimes called 'double dipping.' Here, the investor gets their 1× back AND participates in the remaining distribution alongside common shareholders. This is common in US VC but increasingly appearing in Indian term sheets as well. On a small exit, it can dramatically reduce founder proceeds.

A 2× or 3× liquidation preference means the investor receives 2 or 3 times their investment before anyone else sees a rupee. Always push back on anything above 1×.

Anti-dilution protects an investor if you raise a future round at a lower valuation (a 'down round'). There are two main types.

Full ratchet anti-dilution is the most investor-friendly and founder-hostile: if you raise at any lower price, the investor's price per share is retroactively adjusted to the new lower price. This can massively dilute founders in a down round.

Broad-based weighted average anti-dilution is the market standard and far more reasonable. It adjusts the conversion price based on a formula that considers both the new price and the number of shares issued. Insist on broad-based weighted average if anti-dilution is included at all.

Pro-rata rights allow the investor to maintain their ownership percentage in future rounds by investing their proportional share. This is standard and generally acceptable — it gives your investor a right to stay in as you grow, which signals long-term conviction.

Some investors ask for super pro-rata rights, which allow them to invest more than their pro-rata share in future rounds. This can crowd out new investors and limit your ability to bring in strategic capital. Avoid super pro-rata unless the investor is genuinely strategic.

Who controls your board is who controls your company. A typical pre-seed or seed board for an Indian startup has three seats: two founders, one investor. This is balanced and founder-friendly.

Be wary of any structure that gives investors a board majority before Series A. Also watch the list of Reserved Matters — decisions that require investor approval regardless of board composition. These commonly include raising new debt, issuing new shares, changing the business model, or making acquisitions above a threshold. A short, reasonable reserved matters list is fine. A list of 25 items covering day-to-day operations is a red flag.

Always have an independent lawyer — not the investor's lawyer — review your term sheet before signing.