In 26 years of advising on transactions, I have watched more promoters sign documents they did not fully understand than I care to admit.
Not because they are careless. Because the language of deal-making — liquidation preferences, anti-dilution provisions, drag-along rights, ratchet mechanisms — is designed by and for lawyers and investment professionals. It is not designed for the person whose life’s work is on the other side of the table.
A term sheet is typically the first formal document in a transaction. It is also, in my experience, the document that sets the trajectory for everything that follows — the due diligence, the negotiation, the definitive agreements, the closing, and ultimately whether the promoter walks away satisfied or regretful.
Yet most Indian business owners in the ₹10 crore to ₹200 crore range encounter a term sheet for the first time during their first (and often only) significant transaction. They are reading a document for the first time that the person on the other side of the table has drafted hundreds of times.
That asymmetry matters. It does not mean the investor or buyer is acting in bad faith. It means you need to understand what every clause actually does — not what it sounds like, but what it does to your economics, your control, and your ability to make decisions about your own company.
This guide walks through every material term you will encounter in an Indian term sheet — whether for a PE investment, a strategic acquisition, or a fundraise — in the order they typically appear. Each term is explained in plain language, illustrated with a practical example, and accompanied by what I would tell a client sitting across my desk.
First: What Is a Term Sheet?
A term sheet is a document that sets out the key commercial and legal terms of a proposed transaction between an investor (or buyer) and a company. It is signed after the parties have reached preliminary agreement on the broad contours of a deal, but before the detailed definitive agreements — such as the Share Purchase Agreement (SPA), Share Subscription Agreement (SSA), Shareholders’ Agreement (SHA), or Business Transfer Agreement (BTA) — are drafted.
The critical thing to understand: a term sheet is generally non-binding.
Under Indian contract law, a term sheet is treated as a preliminary, presumptively non-binding document. This was decisively clarified in the landmark OYO v. Zostel case (Delhi High Court, May 2025), where the Court set aside an arbitral award that had treated a non-binding term sheet as enforceable. The Court held that where a term sheet expressly states it is non-binding and is subject to execution of definitive agreements, it must be interpreted according to its express terms — parties’ subsequent conduct cannot override the clear language of the document. As the International Bar Association’s analysis (June 2026) noted, the dispute spanned nearly a decade before concluding when Zostel withdrew its special leave petition before the Supreme Court in July 2025.
However, certain clauses within a term sheet are typically binding. As iPleaders’ 2026 guide documents, five provisions are generally expressly binding:
- Confidentiality (protecting information shared during negotiations)
- Exclusivity / no-shop (preventing you from negotiating with others for a fixed period)
- Costs (who bears advisory and legal expenses)
- Governing law and jurisdiction
- Conditions precedent to the transaction
Everything else — valuation, investment amount, governance rights, exit terms — is non-binding until incorporated into the definitive agreements. But do not mistake “non-binding” for “unimportant.” The term sheet sets the framework that the definitive documents will formalise. If you accept a clause in the term sheet, renegotiating it at the SHA stage is significantly harder.
The Terms That Determine Your Economics
Valuation
This is the number that gets the most attention — and, paradoxically, is often the least well understood.
A term sheet will typically state the pre-money valuation and the post-money valuation. The difference between them is the investment amount itself.
Post-money valuation = Pre-money valuation + Investment amount
Worked example:
An investor offers to invest ₹20 crore at a pre-money valuation of ₹80 crore.
| Component | Amount |
|---|---|
| Pre-money valuation | ₹80 crore |
| Investment amount | ₹20 crore |
| Post-money valuation | ₹100 crore |
| Investor’s stake | ₹20 Cr ÷ ₹100 Cr = 20% |
| Promoter’s remaining stake | 80% |
This looks straightforward. But here is where it gets complex.
Watch for the ESOP pool expansion. Many term sheets require that an employee stock option pool (ESOP pool) of 5% to 15% be created or expanded before the investment — meaning it comes out of the promoter’s share, not the investor’s. If the term sheet says “₹80 crore pre-money valuation, inclusive of a 10% ESOP pool to be created prior to closing,” the promoter’s effective ownership is not 80%. It is 70%.
| Component | Without ESOP | With 10% ESOP |
|---|---|---|
| Promoter’s post-money stake | 80% | 70% |
| ESOP pool | 0% | 10% |
| Investor | 20% | 20% |
The valuation headline did not change. The promoter’s economics did — by 10 percentage points of ownership. This is a ₹10 crore difference in economic value on a ₹100 crore company. I have seen promoters miss this entirely because they focused on the headline number.
What I tell clients: The question is not “what is the valuation?” The question is “what is my effective ownership after investment, ESOP pool, and all adjustments?”
Investment Amount and Structure
The term sheet specifies the total investment amount and how it will be structured. Common structures in India include:
Equity shares — the simplest form. The investor receives ordinary equity shares at a price per share derived from the agreed valuation.
Compulsorily Convertible Preference Shares (CCPS) — the most common instrument in Indian PE and VC transactions. CCPS carry preferential rights (particularly on liquidation) but are mandatorily converted to equity shares at a future date or upon a trigger event (such as an IPO). CCPS allow investors to have economic downside protection while participating in equity upside.
Compulsorily Convertible Debentures (CCDs) — debt instruments that convert to equity. Less common in mid-market transactions but used in specific structuring scenarios, particularly where FEMA considerations apply.
What I tell clients: The instrument type is not a formality. CCPS with a liquidation preference of 1× means that in any exit scenario, the investor gets their money back first, before any distribution to the promoter. That changes the economics of every exit below a certain threshold. More on this in the next section.
Liquidation Preference
This is, in my experience, the single most consequential economic term in a PE term sheet — and the one most frequently misunderstood by Indian promoters.
A liquidation preference determines who gets paid first, and how much, in a “liquidity event” — which includes not just liquidation (winding up the company) but also a sale, merger, or acquisition.
The standard term: “1× non-participating liquidation preference.”
This means: in any exit, the investor receives the higher of (a) 1× their original investment, or (b) their pro-rata share of the exit proceeds.
Worked example — 1× non-participating:
Investor put in ₹20 crore for 20%. Three years later, the company is sold.
| Exit Value | Investor Gets (1× or 20%) | Promoter Gets (remainder) |
|---|---|---|
| ₹50 crore | ₹20 crore (1× preference) | ₹30 crore |
| ₹100 crore | ₹20 crore (20% share) | ₹80 crore |
| ₹200 crore | ₹40 crore (20% share) | ₹160 crore |
| ₹15 crore | ₹15 crore (all available) | ₹0 |
Notice the last row. If the exit is below the investment amount, the investor takes everything available, and the promoter receives nothing. The liquidation preference protects the investor’s downside — that is its purpose.
Now, the dangerous variant: 1× participating liquidation preference.
This means: the investor receives 1× their investment back first, and then also participates in the remaining proceeds pro-rata.
Same example — 1× participating:
| Exit Value | Investor Gets | Promoter Gets |
|---|---|---|
| ₹50 crore | ₹20 Cr + 20% of ₹30 Cr = ₹26 crore | ₹24 crore |
| ₹100 crore | ₹20 Cr + 20% of ₹80 Cr = ₹36 crore | ₹64 crore |
| ₹200 crore | ₹20 Cr + 20% of ₹180 Cr = ₹56 crore | ₹144 crore |
At a ₹200 crore exit, the participating preference costs the promoter ₹16 crore more than the non-participating version (₹56 crore vs ₹40 crore to the investor). The participating investor effectively gets paid twice — once through the preference, and again through their equity share.
What I tell clients: If you see “participating” in the liquidation preference clause, that is the single most important negotiation point in the entire term sheet. In a moderate exit scenario, the difference between participating and non-participating can amount to crores. Push hard for non-participating. If the investor insists on participating, negotiate a “cap” — for example, 3× total return, after which the preference converts and they participate only as equity.
Anti-Dilution Protection
This clause protects the investor if the company raises a future round at a lower valuation (a “down round”).
The standard versions:
Full ratchet — the harshest form. If the company ever issues shares at a lower price than what the investor paid, the investor’s conversion price is adjusted down to the new lower price, as if they had invested at that price all along. This can massively increase the investor’s ownership percentage at the promoter’s expense.
Weighted average — the more common and reasonable form. The adjustment is proportional to the size of the down round relative to the total shares outstanding.
Worked example — full ratchet:
Investor buys 20% at ₹100 per share (₹20 crore investment, 2 lakh shares). A year later, the company raises at ₹50 per share.
Under full ratchet, the investor’s conversion price adjusts to ₹50. Their ₹20 crore now converts into 4 lakh shares instead of 2 lakh — effectively doubling their stake from 20% to approximately 33%, entirely at the promoter’s expense.
What I tell clients: Full ratchet is aggressive. In a mid-market PE deal, weighted average anti-dilution is the market standard and the one you should accept. Full ratchet should be resisted unless the deal circumstances are genuinely unusual.
The Terms That Determine Your Control
Board Composition
The term sheet will specify how the board of directors is constituted after the investment. A typical formulation:
“The Board shall comprise 5 directors: 3 nominated by the Promoter, 1 nominated by the Investor, and 1 Independent Director mutually agreed.”
This looks like the promoter retains control. But read further.
Affirmative Vote / Veto Rights (Reserved Matters)
This is where effective control often shifts. The term sheet will include a list of “reserved matters” or “affirmative vote matters” — decisions that require the investor’s consent before they can be taken, regardless of the board composition.
A typical reserved matters list in an Indian PE term sheet includes:
- Any change to the company’s capital structure (issuance of new shares, buyback)
- Borrowing above a specified threshold (e.g., ₹2 crore)
- Related-party transactions above a threshold
- Changes to the business plan or annual budget beyond an agreed deviation
- Appointment or removal of key management personnel (CEO, CFO)
- Sale, merger, or acquisition of the company or its assets
- Declaration of dividends
- Amendment to the Articles of Association
- Material contracts above a specified value
- Entry into new business lines or geographies
The practical implication: Even if you hold 80% equity and 3 of 5 board seats, you cannot take any of these decisions without the investor’s written consent. This is not a theoretical concern. I have seen promoters unable to hire a new CFO, unable to enter a new market, and unable to take a ₹3 crore loan — all because the reserved matters clause required investor approval, and the investor was slow to respond or had different priorities.
What I tell clients: The reserved matters list is where the real negotiation happens, not the board seats. Review every item. Push for higher thresholds (e.g., ₹5 crore borrowing limit instead of ₹2 crore). Remove items that are operationally routine. And most critically, ensure there is a mechanism for deemed consent if the investor does not respond within a specified timeframe (e.g., 15 business days).
Information Rights
The term sheet will require the company to provide the investor with regular financial and operational information — typically monthly MIS reports, quarterly financial statements, annual audited accounts, and the annual budget for approval.
This is reasonable and standard. But watch for the scope. If the information rights clause includes “any other information that the Investor may reasonably request,” that is effectively an open-ended right to demand access to any aspect of your business at any time. I would recommend defining the information schedule specifically rather than leaving it open.
The Terms That Determine Your Exit
Drag-Along Rights
A drag-along clause allows the majority shareholder (or the investor, depending on how it is drafted) to compel all other shareholders to sell their shares in a transaction at the same price and on the same terms.
Worked example: The investor holds 30% and finds a buyer willing to acquire 100% at ₹120 crore. If the investor exercises drag-along, the promoter (holding 70%) is compelled to sell — even if the promoter does not want to exit at ₹120 crore.
What I tell clients: Drag-along is standard and serves a legitimate purpose — no buyer wants to acquire 100% only to find that 30% of the shareholders are refusing to sell. But the terms matter enormously. Negotiate a minimum valuation floor below which drag-along cannot be exercised. Negotiate a minimum holding period before drag-along becomes exercisable (e.g., not before 4 years). And ensure that the drag-along price must be validated by an independent valuer.
Tag-Along Rights
The mirror of drag-along. Tag-along gives the minority shareholder the right to participate in any sale by the majority shareholder, at the same price and on the same terms.
Why this matters for promoters: If you hold 80% and the investor holds 20%, and you find a buyer for your 80% stake, the investor can exercise tag-along and insist that their 20% is included in the transaction at the same price. This is reasonable — it prevents the promoter from selling at a premium while the investor is left holding an illiquid minority stake with a new controlling shareholder they did not choose.
Put and Call Options
Put option: Gives the investor the right to compel the promoter (or the company) to buy back their shares at a predetermined price or formula after a specified period.
Call option: Gives the promoter the right to buy the investor’s shares at a predetermined price or formula.
The risk with put options: If the investor has a put option at, say, 1.5× their investment after 5 years, and the company has not achieved an exit by then, the promoter may be personally obligated to fund a buyback at a price that may exceed the company’s value. I have seen promoters face severe personal financial pressure because they signed a put option without fully understanding the obligation it created.
What I tell clients: Read the put option clause more carefully than any other clause in the term sheet. Understand the trigger date, the pricing formula, and whether the obligation falls on the company or on you personally. If the put is at a guaranteed return (e.g., IRR of 18%), that is effectively a debt obligation disguised as equity — and it may have FEMA implications for foreign investors.
Exit Timeline and Mechanism
The term sheet will typically specify the investor’s expected exit timeline (usually 4 to 7 years) and the anticipated exit routes — IPO, strategic sale, secondary sale, or buyback.
What I tell clients: Pay close attention to what happens if an exit has not been achieved by the end of the specified timeline. Does the investor gain additional rights? Does the put option activate? Does the drag-along threshold change? The “if no exit by Year 5” scenario is where the term sheet’s true teeth are revealed.
The Binding Clauses: What You Cannot Walk Away From
As noted earlier, while most of the term sheet is non-binding, certain clauses are expressly binding from the moment you sign:
Exclusivity (No-Shop)
This clause prohibits the company (and typically the promoter) from soliciting, negotiating with, or entertaining proposals from any other potential investor or buyer for a specified period — usually 30 to 90 days.
The practical implication: Once you sign a term sheet with an exclusivity clause, you are locked in. If the deal falls through after 75 days, you have lost 75 days of market time, potential buyers may have moved on, and any information shared during the period is now in the hands of a party who is no longer transacting with you.
What I tell clients: Keep the exclusivity period as short as possible — 30 to 45 days is reasonable. Negotiate a “drop dead” date after which exclusivity automatically expires. And ensure there is a clear trigger for termination if the investor fails to proceed in good faith (e.g., does not commence due diligence within 10 days of signing).
Confidentiality
Binding on both parties. Prevents disclosure of the transaction, the terms, and any proprietary information exchanged during negotiations. Standard and necessary — but ensure it includes a clear survival period (typically 2 to 3 years) and carve-outs for disclosures required by law or regulation.
Costs
Specifies who bears the costs of the transaction — legal fees, due diligence expenses, stamp duty, and regulatory filing fees. In most Indian PE transactions, the company bears the investor’s legal and DD costs up to a specified cap. This can amount to ₹15 to ₹50 lakh depending on the transaction size and complexity. Ensure there is a cap, and ensure it applies even if the transaction does not close.
A Practical Checklist: What to Do When You Receive a Term Sheet
In my experience, the difference between a promoter who navigates a term sheet well and one who does not is not intelligence or business acumen. It is preparation. Here is what I recommend:
Do not sign on the day you receive it. You are not expected to. Take 7 to 14 days to review, consult, and respond. Any investor who pressures you to sign immediately is sending a signal you should pay attention to.
Engage a qualified M&A advisor and a transaction lawyer before responding. Your regular CA and company lawyer may not have term sheet experience. This is a specialised document that requires specialised advice. The advisory fee will be a fraction of the value it protects.
Focus on economics second, control first. Most promoters fixate on the valuation number. Experienced promoters focus on the reserved matters list, the liquidation preference, and the exit clauses. These determine what you can actually do with your company after the investment, and what happens if things do not go as planned.
Model the downside scenarios. What happens if the company is sold at 0.5× the post-money valuation? What happens if there is a down round? What happens if the investor exercises the put option in Year 5? The term sheet should work for you not just in the best case, but in the worst case.
Read the non-obvious clauses. ESOP pool size and when it is created. The definition of “liquidity event” (does it include asset sales?). The deemed consent mechanism (or absence of one). The non-compete scope and duration. The investor’s right to transfer their shares to an affiliate without your consent.
A Self-Assessment: How Ready Are You to Evaluate a Term Sheet?
| # | Question | Yes/No |
|---|---|---|
| 1 | Do you understand the difference between pre-money and post-money valuation? | |
| 2 | Can you calculate your effective ownership after ESOP pool dilution? | |
| 3 | Do you know whether your term sheet has a participating or non-participating liquidation preference? | |
| 4 | Can you identify every decision that requires investor veto consent? | |
| 5 | Do you understand what the put option obligates you to do — and when? | |
| 6 | Do you know your effective economics at a 0.5× exit vs a 3× exit? | |
| 7 | Have you engaged a transaction lawyer (not your regular company lawyer)? | |
| 8 | Have you modelled the anti-dilution impact of a potential down round? |
If you answered “no” to more than two of these, you should engage professional advisory support before responding to the term sheet. This is not a document to navigate on instinct.
The Market Context: Why This Matters in 2026
India’s PE/VC market deployed US$60.7 billion across 1,475 deals in 2025 — the second-highest on record, per EY-IVCA. PE investments in H1 2026 totalled US$8.7 billion, with investors clearly preferring late-stage, mature businesses — exactly the ₹10 crore to ₹200 crore segment.
Bain’s India PE Report 2026 confirmed a shift in PE strategy: with multiple expansion becoming less reliable, firms are focused on operational improvement, governance, and buy-and-build approaches. This means PE firms are being more exacting in their term sheets — requesting stronger governance rights, tighter reserved matters lists, and clearer exit mechanisms.
For promoters, this is a double-edged reality. Capital is available and actively seeking well-run Indian mid-market companies. But the terms on which that capital comes have become more structured, more institutional, and less negotiable on governance provisions. Understanding what you are signing has never been more important.
A Final Observation
A term sheet is not a prize to be won. It is a framework to be understood.
I have seen promoters so excited about receiving a term sheet, “a PE fund wants to invest in my company!” that they sign without fully grasping what they have agreed to. And I have seen the consequences: loss of operational autonomy, forced exits at unfavourable valuations, personal liability on put options, and relationships that deteriorated because expectations were misaligned from the start.
The term sheet is where those expectations are set. Every clause you accept defines a right, an obligation, or a constraint that will govern your relationship with the investor for the next 4 to 7 years.
Read it carefully. Understand it fully. Negotiate it deliberately. And if any clause does not make sense to you in plain language, do not sign until it does.
How IBGrid Supports This Process
At IBGrid, term sheet review and negotiation is a core part of our fundraising advisory. When we represent a client, we ensure that every clause is reviewed against market standards, that the economics are modelled across multiple scenarios, and that the promoter understands exactly what they are agreeing to, not just the valuation headline, but the control provisions, the exit mechanics, and the downside protections.
Our advisory team has evaluated term sheets from PE funds, family offices, and strategic investors across hundreds of Indian mid-market transactions. We know what is standard, what is aggressive, and what should be pushed back on.
For a confidential discussion, our team can be reached here. For a preliminary valuation, IBGrid offers a free Valuation Calculator.
IBGrid offers M&A advisory, fundraising, and business valuation services for Indian companies with ₹10 crore to ₹200 crore annual turnover. Our offices span Ahmedabad, Bangalore, Chennai, Delhi/NCR, Hyderabad, Mumbai, and Pune. IBGrid is a subsidiary of IndiaBizForSale