Investor<\/td> 20%<\/td> 20%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nThe valuation headline did not change. The promoter’s economics did \u2014 by 10 percentage points of ownership. This is a \u20b910 crore difference in economic value on a \u20b9100 crore company. I have seen promoters miss this entirely because they focused on the headline number.<\/p>\n\n\n\n
What I tell clients:<\/strong> The question is not “what is the valuation?” The question is “what is my effective ownership after investment, ESOP pool, and all adjustments?”<\/p>\n\n\n\n<\/span>Investment Amount and Structure<\/span><\/h3>\n\n\n\nThe term sheet specifies the total investment amount and how it will be structured. Common structures in India include:<\/p>\n\n\n\n
Equity shares<\/strong> \u2014 the simplest form. The investor receives ordinary equity shares at a price per share derived from the agreed valuation.<\/p>\n\n\n\nCompulsorily Convertible Preference Shares (CCPS)<\/strong> \u2014 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.<\/p>\n\n\n\nCompulsorily Convertible Debentures (CCDs)<\/strong> \u2014 debt instruments that convert to equity. Less common in mid-market transactions but used in specific structuring scenarios, particularly where FEMA considerations apply.<\/p>\n\n\n\nWhat I tell clients:<\/strong> The instrument type is not a formality. CCPS with a liquidation preference of 1\u00d7 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.<\/p>\n\n\n\n<\/span>Liquidation Preference<\/span><\/h3>\n\n\n\nThis is, in my experience, the single most consequential economic term in a PE term sheet \u2014 and the one most frequently misunderstood by Indian promoters.<\/p>\n\n\n\n
A liquidation preference determines who gets paid first, and how much, in a “liquidity event” \u2014 which includes not just liquidation (winding up the company) but also a sale, merger, or acquisition.<\/p>\n\n\n\n
The standard term:<\/strong> “1\u00d7 non-participating liquidation preference.”<\/p>\n\n\n\nThis means: in any exit, the investor receives the higher of (a) 1\u00d7 their original investment, or (b) their pro-rata share of the exit proceeds.<\/p>\n\n\n\n
Worked example \u2014 1\u00d7 non-participating:<\/strong><\/p>\n\n\n\nInvestor put in \u20b920 crore for 20%. Three years later, the company is sold.<\/p>\n\n\n\nExit Value<\/th> Investor Gets (1\u00d7 or 20%)<\/th> Promoter Gets (remainder)<\/th><\/tr><\/thead> \u20b950 crore<\/td> \u20b920 crore (1\u00d7 preference)<\/td> \u20b930 crore<\/td><\/tr> \u20b9100 crore<\/td> \u20b920 crore (20% share)<\/td> \u20b980 crore<\/td><\/tr> \u20b9200 crore<\/td> \u20b940 crore (20% share)<\/td> \u20b9160 crore<\/td><\/tr> \u20b915 crore<\/td> \u20b915 crore (all available)<\/td> \u20b90<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nNotice 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 \u2014 that is its purpose.<\/p>\n\n\n\n
Now, the dangerous variant: 1\u00d7 participating liquidation preference.<\/strong><\/p>\n\n\n\nThis means: the investor receives 1\u00d7 their investment back first, and then also participates<\/em> in the remaining proceeds pro-rata.<\/p>\n\n\n\nSame example \u2014 1\u00d7 participating:<\/strong><\/p>\n\n\n\nExit Value<\/th> Investor Gets<\/th> Promoter Gets<\/th><\/tr><\/thead> \u20b950 crore<\/td> \u20b920 Cr + 20% of \u20b930 Cr = \u20b926 crore<\/strong><\/td>\u20b924 crore<\/strong><\/td><\/tr>\u20b9100 crore<\/td> \u20b920 Cr + 20% of \u20b980 Cr = \u20b936 crore<\/strong><\/td>\u20b964 crore<\/strong><\/td><\/tr>\u20b9200 crore<\/td> \u20b920 Cr + 20% of \u20b9180 Cr = \u20b956 crore<\/strong><\/td>\u20b9144 crore<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\nAt a \u20b9200 crore exit, the participating preference costs the promoter \u20b916 crore more than the non-participating version (\u20b956 crore vs \u20b940 crore to the investor). The participating investor effectively gets paid twice \u2014 once through the preference, and again through their equity share.<\/p>\n\n\n\n
What I tell clients:<\/strong> 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” \u2014 for example, 3\u00d7 total return, after which the preference converts and they participate only as equity.<\/p>\n\n\n\n<\/span>Anti-Dilution Protection<\/span><\/h3>\n\n\n\nThis clause protects the investor if the company raises a future round at a lower valuation (a “down round”).<\/p>\n\n\n\n
The standard versions:<\/strong><\/p>\n\n\n\nFull ratchet<\/strong> \u2014 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.<\/p>\n\n\n\nWeighted average<\/strong> \u2014 the more common and reasonable form. The adjustment is proportional to the size of the down round relative to the total shares outstanding.<\/p>\n\n\n\nWorked example \u2014 full ratchet:<\/strong><\/p>\n\n\n\nInvestor buys 20% at \u20b9100 per share (\u20b920 crore investment, 2 lakh shares). A year later, the company raises at \u20b950 per share.<\/p>\n\n\n\n
Under full ratchet, the investor’s conversion price adjusts to \u20b950. Their \u20b920 crore now converts into 4 lakh shares instead of 2 lakh \u2014 effectively doubling their stake from 20% to approximately 33%, entirely at the promoter’s expense.<\/p>\n\n\n\n
What I tell clients:<\/strong> 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.<\/p>\n\n\n\n<\/span>The Terms That Determine Your Control<\/span><\/h2>\n\n\n\n<\/span>Board Composition<\/span><\/h3>\n\n\n\nThe term sheet will specify how the board of directors is constituted after the investment. A typical formulation:<\/p>\n\n\n\n
\n“The Board shall comprise 5 directors: 3 nominated by the Promoter, 1 nominated by the Investor, and 1 Independent Director mutually agreed.”<\/p>\n<\/blockquote>\n\n\n\n
This looks like the promoter retains control. But read further.<\/p>\n\n\n\n
<\/span>Affirmative Vote \/ Veto Rights (Reserved Matters)<\/span><\/h3>\n\n\n\nThis is where effective control often shifts. The term sheet will include a list of “reserved matters” or “affirmative vote matters” \u2014 decisions that require the investor’s consent before they can be taken, regardless of the board composition.<\/p>\n\n\n\n
A typical reserved matters list in an Indian PE term sheet includes:<\/p>\n\n\n\n
\nAny change to the company’s capital structure (issuance of new shares, buyback)<\/li>\n\n\n\n Borrowing above a specified threshold (e.g., \u20b92 crore)<\/li>\n\n\n\n Related-party transactions above a threshold<\/li>\n\n\n\n Changes to the business plan or annual budget beyond an agreed deviation<\/li>\n\n\n\n Appointment or removal of key management personnel (CEO, CFO)<\/li>\n\n\n\n Sale, merger, or acquisition of the company or its assets<\/li>\n\n\n\n Declaration of dividends<\/li>\n\n\n\n Amendment to the Articles of Association<\/li>\n\n\n\n Material contracts above a specified value<\/li>\n\n\n\n Entry into new business lines or geographies<\/li>\n<\/ul>\n\n\n\nThe practical implication:<\/strong> 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 \u20b93 crore loan \u2014 all because the reserved matters clause required investor approval, and the investor was slow to respond or had different priorities.<\/p>\n\n\n\nWhat I tell clients:<\/strong> The reserved matters list is where the real negotiation happens, not the board seats. Review every item. Push for higher thresholds (e.g., \u20b95 crore borrowing limit instead of \u20b92 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).<\/p>\n\n\n\n<\/span>Information Rights<\/span><\/h3>\n\n\n\nThe term sheet will require the company to provide the investor with regular financial and operational information \u2014 typically monthly MIS reports, quarterly financial statements, annual audited accounts, and the annual budget for approval.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
<\/span>The Terms That Determine Your Exit<\/span><\/h2>\n\n\n\n<\/span>Drag-Along Rights<\/span><\/h3>\n\n\n\nA 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.<\/p>\n\n\n\n
Worked example:<\/strong> The investor holds 30% and finds a buyer willing to acquire 100% at \u20b9120 crore. If the investor exercises drag-along, the promoter (holding 70%) is compelled to sell \u2014 even if the promoter does not want to exit at \u20b9120 crore.<\/p>\n\n\n\nWhat I tell clients:<\/strong> Drag-along is standard and serves a legitimate purpose \u2014 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<\/strong> below which drag-along cannot be exercised. Negotiate a minimum holding period<\/strong> 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.<\/p>\n\n\n\n<\/span>Tag-Along Rights<\/span><\/h3>\n\n\n\nThe 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.<\/p>\n\n\n\n
Why this matters for promoters:<\/strong> 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 \u2014 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.<\/p>\n\n\n\n<\/span>Put and Call Options<\/span><\/h3>\n\n\n\nPut option:<\/strong> 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.<\/p>\n\n\n\nCall option:<\/strong> Gives the promoter the right to buy the investor’s shares at a predetermined price or formula.<\/p>\n\n\n\nThe risk with put options:<\/strong> If the investor has a put option at, say, 1.5\u00d7 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.<\/p>\n\n\n\nWhat I tell clients:<\/strong> 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 \u2014 and it may have FEMA implications for foreign investors.<\/p>\n\n\n\n<\/span>Exit Timeline and Mechanism<\/span><\/h3>\n\n\n\nThe term sheet will typically specify the investor’s expected exit timeline (usually 4 to 7 years) and the anticipated exit routes \u2014 IPO, strategic sale, secondary sale, or buyback.<\/p>\n\n\n\n
What I tell clients:<\/strong> 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.<\/p>\n\n\n\n<\/span>The Binding Clauses: What You Cannot Walk Away From<\/span><\/h2>\n\n\n\nAs noted earlier, while most of the term sheet is non-binding, certain clauses are expressly binding from the moment you sign:<\/p>\n\n\n\n
<\/span>Exclusivity (No-Shop)<\/span><\/h3>\n\n\n\nThis 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 \u2014 usually 30 to 90 days.<\/p>\n\n\n\n
The practical implication:<\/strong> 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.<\/p>\n\n\n\nWhat I tell clients:<\/strong> Keep the exclusivity period as short as possible \u2014 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).<\/p>\n\n\n\n<\/span>Confidentiality<\/span><\/h3>\n\n\n\nBinding on both parties. Prevents disclosure of the transaction, the terms, and any proprietary information exchanged during negotiations. Standard and necessary \u2014 but ensure it includes a clear survival period (typically 2 to 3 years) and carve-outs for disclosures required by law or regulation.<\/p>\n\n\n\n
<\/span>Costs<\/span><\/h3>\n\n\n\nSpecifies who bears the costs of the transaction \u2014 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 \u20b915 to \u20b950 lakh depending on the transaction size and complexity. Ensure there is a cap, and ensure it applies even if the transaction does not close.<\/p>\n\n\n\n
<\/span>A Practical Checklist: What to Do When You Receive a Term Sheet<\/span><\/h2>\n\n\n\nIn 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:<\/p>\n\n\n\n
Do not sign on the day you receive it.<\/strong> 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.<\/p>\n\n\n\nEngage a qualified M&A advisor and a transaction lawyer before responding.<\/strong> 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.<\/p>\n\n\n\n