A venture capital term sheet sets out the key economic and governance terms on which an investor proposes to invest in a startup. While typically non-binding (except for exclusivity and confidentiality), it forms the basis for the definitive transaction documents — the share subscription agreement, shareholders agreement and articles of association.
The critical economic terms in a VC term sheet include: pre-money and post-money valuation; instrument (compulsorily convertible preference shares or CCPS are the standard instrument for VC investments in India, as equity shares do not permit liquidation preferences); liquidation preference (1x non-participating, 1x participating or capped participating); anti-dilution protection (broad-based weighted average or full ratchet); and the option pool. Governance terms include: board composition (investor-nominated directors, observer rights); protective provisions (veto rights over specified actions); information and inspection rights; pre-emptive rights and right of first refusal (ROFR); drag-along and tag-along rights; and founder lock-in and ESOP provisions.
AMLEGALS advises both founders and investors on the negotiation, drafting and documentation of VC term sheets and definitive transaction documents. The practice covers seed, Series A through later-stage rounds, secondary transactions and structured exits.
Advising founders or investors on the negotiation of economic and governance terms.
Advising on pre/post-money mechanics, CCPS structuring, conversion ratios and option pools.
Structuring liquidation preferences and anti-dilution provisions (broad-based weighted average, full ratchet, pay-to-play).
Advising on board composition, reserved matters, veto rights and information rights.
Drafting share subscription agreements, shareholders agreements and amended articles of association.
Advising on secondary sales, drag-along exercise, IPO readiness and M&A exits.
A liquidation preference determines the order and amount in which investors are paid before founders and common shareholders in a liquidation event (sale, winding up or deemed-liquidation event). A 1x non-participating preference means the investor gets back its invested amount before any distribution to common shareholders. A 1x participating preference means the investor gets its invested amount first and then participates pro rata in the remaining distribution with common shareholders.
Anti-dilution protection adjusts the investor's conversion price if the company issues shares at a lower price in a future round (a down round). Broad-based weighted average anti-dilution uses a formula that takes into account both the price and the number of shares issued in the down round, resulting in a less aggressive adjustment. Full ratchet adjusts the conversion price to the lower price of the down round regardless of the number of shares issued.
Compulsorily convertible preference shares (CCPS) are the standard investment instrument for venture capital in India because they allow structuring of liquidation preferences and conversion ratios that equity shares cannot provide. Under Indian company law, equity shares carry equal rights. CCPS convert into equity shares at a specified ratio and upon specified triggers (typically before an IPO or after a defined period). For FEMA purposes, CCPS pricing must comply with RBI guidelines.
Protective provisions (or veto rights) are a set of actions that the company cannot take without the affirmative vote of the investor-nominated director or the consent of the investors holding a specified percentage. Common protective provisions cover: new share issuances, debt above a threshold, related-party transactions, changes to articles, M&A or dissolution, changes to the business, and key management changes.
Term sheets are typically non-binding except for specified provisions — usually exclusivity (no-shop), confidentiality, governing law and jurisdiction. The binding nature of each provision should be clearly stated in the term sheet. The economic and governance terms become binding only when incorporated into the definitive transaction documents (share subscription agreement and shareholders agreement).
No. No engagement is treated as accepted until conflicts, scope and terms are confirmed in writing.
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