पाठशाला Pathshala · धन Dhan, Money · Lesson 13 · Build

The term sheet, clause by clause

A term sheet is two or three pages that decide who is paid first, who is protected when the price falls and who controls the company. Read the economics, then the control, and spend negotiating capital on three clauses.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

The nib of a fountain pen in sharp focus on a pale surface. — Photograph: Sahil Kharbanda · Pexels

A term sheet is the shortest important document a founder will sign. It runs to a few pages, most of it is not legally binding, and every later document in the round is drafted from it. Founders who read it for the price and skim the rest discover the rest in a bad year.

This lesson reads it clause by clause, in the order that makes sense: economics first, control second. What each clause does, what is normal in Indian rounds today, the one place an interactive figure helps (anti-dilution), the clauses that Indian term sheets carry and American templates do not, and the three on which a founder should spend negotiating capital.

Read it in the right order: economics, then control

Brad Feld and Jason Mendelson’s Venture Deals, the most widely read book on the subject, sorts every term into two piles: economics, which decide who gets what money, and control, which decide who decides. The sorting is the first discipline. A term that looks procedural (an information right, a consent) is usually control; a term that looks protective (a preference, an adjustment) is usually economics. Read the economics first because they can be computed, then the control because it cannot.

Two facts about the document itself. Only a few clauses bind on signing, typically confidentiality, exclusivity during which you may not negotiate with others, and who pays the legal costs; read those as contracts. Everything else is an agreement to agree, and in India it becomes two documents: a share subscription agreement for the money and a shareholders’ agreement for the rights. Those rights then have to be copied into the company’s articles of association, for reasons the section on Indian clauses explains.

Price, pool and the paper

The price is stated as a pre-money valuation and a round size. Read the pool clause in the same breath. Most term sheets require an option pool of a stated share of the post-money to be created before the investment, which means it comes out of the founders’ side; Venture Hacks called this the option pool shuffle and showed an $8 million pre-money becoming an effective $6 million. The [seed valuation](/library/seed-valuation-how-number-really-gets-set) lesson has a figure for it. Then read the instrument: in an Indian round it is almost always compulsorily convertible preference shares, and the [CCPS lesson](/library/ccps-instrument-indian-vcs-actually-use) explains why, and which rights ride on them.

Liquidation preference

The preference decides who is paid first when the company is sold or wound up. A 1x non-participating preference returns the investor its money or, if better, its share of the proceeds as if converted; it costs the founders nothing in a good sale and protects the investor in a bad one. A participating preference returns the money and then a share of the rest, a double dip that costs the founders in every sale. A multiple above 1x returns more than the money first. Multiples are rare at the stages this library covers: Carta found that 1.9 per cent of primary seed and Series A rounds on its platform in 2024 carried a preference above 1x. Read also how the series rank against each other: later rounds ranking equally with earlier ones (pari passu) is kinder to everyone below them than a stack in which each new series is paid first.

Anti-dilution

Anti-dilution protects the investor if the company later raises money at a lower price. It works by changing the price at which the investor’s preference shares convert, so they become more equity shares than before. The two forms differ enormously in cost. Full ratchet resets the conversion price to the new, lower price, however little is raised at it. Broad-based weighted average moves the conversion price only part of the way, in proportion to how many shares the down round issues relative to the whole company. The Holloway guide to raising venture capital describes the weighted average as absolutely customary and full ratchet as very atypical. The figure shows why the difference matters.

Take a company with one crore shares in which a Series A investor bought twenty per cent at ₹100 a share. Two years later it raises ₹10 crore at ₹50. With no protection the founders’ side falls from eighty to about 66.7 per cent. With broad-based weighted average the conversion price moves to about ₹91.7 and the founders hold about 65.7 per cent. With full ratchet the conversion price drops to ₹50, the Series A investor’s twenty lakh shares become forty lakh, and the founders hold 57.1 per cent.

Three things to read off it. Under weighted average, a small down round barely moves anything; under full ratchet, even a tiny round at a low price triggers the full adjustment, which is why ratchets make bridge rounds so expensive. The deeper the price cut, the wider the gap between the two forms. And the definition of broad-based matters: a formula that counts the pool and every convertible in the denominator moves the price less than a narrow one that counts only issued shares, so ask which one the term sheet means. Ask also for the usual carve-outs, so that options granted from the pool and shares issued on conversion do not count as a down round.

The price is the clause founders argue about. The pool, the preference and the reserved matters are the clauses that decide what the founders end up owning and deciding.

Pro rata, information and the board

Pro rata rights let the investor keep its percentage by investing in later rounds. They are normal and reasonable; the questions are whether they apply to every investor or only to larger ones, and whether a later lead can cut them back if the round is oversubscribed. Information rights set what the company must send and when: monthly management accounts, an annual budget, audited accounts. Agree a cadence the finance function can actually meet.

The board is the control term with the longest life. A seed or Series A board in which the founders hold a majority and the lead investor holds one seat keeps day-to-day control where it belongs; an independent director chosen jointly is a good addition when the board grows. The term sheet should say how many seats there are, who appoints each, how the number changes in later rounds, and whether observers attend. A board seat is not a veto, which is why the next clause matters more.

The Indian clauses American templates leave out

Reserved matters. Indian term sheets carry a list of actions the company may not take without the investor’s consent, often called affirmative votes. A sensible list covers what changes the investor’s position: new share classes, changes to the articles, a sale or merger, winding up, large borrowings, related-party transactions. A list that extends to the annual budget, every senior hire and every contract above a small sum is a board that meets in the investor’s inbox. Negotiate each item against one question: does this protect the investment, or run the company?

A hand cuts fabric with tailor’s scissors on a workbench. — An imported template has to be cut to Indian measure: reserved matters, transfer restrictions and exit clauses the foreign-exchange rules allow. Photograph: Anna Shvets · Pexels

Transfer restrictions and founder lock-in. Founders’ shares are usually locked for a period, and transfers by anyone are subject to a right of first refusal, tag-along and drag-along. These are normal; read the drag-along threshold and who can trigger it.

Exit clauses. Indian term sheets often require the company to give investors an exit by a date, through a public offer or a strategic sale, with consequences if it does not. For a foreign investor, the Reserve Bank’s Master Direction allows optionality clauses only after a minimum lock-in of one year and without any assured exit price: the investor exits at the price prevailing at the time. A clause that promises a foreign investor its money back with a return is not permitted by those rules; read what the clause actually obliges the founders to do personally, and refuse any personal obligation to buy shares.

The articles. In V.B. Rangaraj (1992) the Supreme Court held that a restriction on transferring shares binds the company and its shareholders only if it is in the articles; a later Supreme Court decision took a different view and the law remains unsettled. The practical answer is to copy every right in the shareholders’ agreement into the articles. Read the amended articles as carefully as the agreement, because that is the document a court will read.

The three to negotiate, and the ninety-minute read

Negotiating capital is finite, and spending it on everything signals that nothing matters. Spend it on three clauses. The pool: size it from a hiring plan and ask that it sit in the post-money, which is worth more than most headline arguments. The preference: 1x, non-participating, pari passu with later series. The board and the reserved matters: a founder majority, and a reserved list that protects the investment without running the company. Accept customary terms elsewhere, which is what signals good faith.

Then, before signing, ninety minutes with the term sheet, a spreadsheet and the two figures in this track. Compute the founders’ stake after the round, with the pool. Compute what the founders’ side receives at a sale for half the post-money, the post-money and three times it, using the [CCPS lesson’s](/library/ccps-instrument-indian-vcs-actually-use) waterfall. Run a down round at half the price through the figure above. List every reserved matter and mark each protect or run. Mark the binding clauses and the exclusivity date in the calendar. Then call two founders the investor has backed and ask how the terms felt in their worst quarter. Do this for every term sheet, including the one from the investor you already want.

Nothing here is legal, tax or investment advice. The foreign-exchange provisions were checked on 11 October 2026; have the term sheet, the agreements and the articles reviewed by a lawyer who has closed Indian venture rounds.