Pending CA sign-off — educational decoder, not deal advice.

Term Sheet Clause Decoder

Binding status

An Indian term sheet is typically non-binding (except for exclusivity and confidentiality clauses which ARE binding). The binding contract is the SHA (Shareholders' Agreement). Exclusivity/confidentiality clauses are generally enforceable if certain and supported by consideration; an outsized break-up fee risks being read down as a penalty under s.74 Indian Contract Act unless drafted as a genuine pre-estimate of loss.

Valuation / Pre-money valuation

economics

Angel tax (s.56(2)(viib)) was abolished by Finance (No.2) Act 2024 w.e.f. AY 2025-26 — share premium above FMV is no longer taxable in the company's hands. FMV/pricing discipline still matters for FEMA (NDI Rules 2019 pricing) and stamp duty, not income-tax.

Red flags

  • ⚠ Pre-money valuation not explicitly stated — post-money often inserted instead
  • ⚠ Valuation based on non-Indian methodology (US DCF assumptions)

India-specific context

CA review

Confirm FMV/pricing discipline for FEMA (NDI Rules 2019 pricing) and stamp duty; angel tax is no longer a live income-tax risk.

Term sheets are not standardised in India. IVCA (Indian Venture Capital Association) publishes model documents. Key India-specific issues (CCPS structure, FEMA pricing, Companies Act constraints on SHA) are often missing from US-law term sheet templates. This tool flags common issues — engage a startup lawyer for deal review.

Overview: governing documents

  1. SHA (Shareholders' Agreement) — the primary contract between investors and founders
  2. Articles of Association — governs the company's internal governance; must align with SHA provisions
  3. Subscription Agreement — the share purchase contract (payment → allotment)
  4. SSA (Share Subscription Agreement) + SHA often combined in a single document
US term sheets are typically for Delaware C-Corps with Delaware law. Indian term sheets cover: (a) CCPS/CCDs as the predominant instruments, (b) Companies Act restrictions, (c) FEMA pricing obligations for foreign investors. SAFE-style instruments are not standard in India; DPIIT-recognised startups can raise via convertible notes (₹25 lakh minimum per investor under FEMA's convertible-note route, FEMA (NDI) Rules 2019 read with the RBI notification on convertible notes) — confirm the current RBI/FEMA position with counsel before advising.
CA review

Whether a term sheet with exclusivity clause can be enforced as a binding contract in India — Indian courts apply ICA 1872 and will treat an exclusivity/break-up fee clause as an enforceable contractual obligation even if the main term sheet is non-binding. Confirm break-up fee quantum — typically 1-3% of deal value.

Term sheets are not standardised in India. IVCA (Indian Venture Capital Association) publishes model documents. Key India-specific issues (CCPS structure, FEMA pricing, Companies Act constraints on SHA) are often missing from US-law term sheet templates. This tool flags common issues — engage a startup lawyer for deal review.

India-Specific Red Flags in a Term Sheet

  • ⚠ FEMA compliance: no section on Foreign Investment guidelines if investor is a foreign entity (FC-GPR filing, FEMA (NDI) Rules 2019 pricing) → deal may fail at closing
  • ⚠ ESOP: ESOP reserve mentioned but no reference to Companies Act s.62(1)(b) procedure → ESOP pool creation requires shareholder approval
  • ⚠ No mention of FLA (Foreign Liabilities and Assets) reporting obligation for company receiving FDI
  • ⚠ Term sheet states 'common stock' instead of 'CCPS' → may indicate US-standard document applied to Indian company

Statutory basis: Companies Act 2013 (CA 2013); Indian Contract Act 1872 (ICA 1872); FEMA 1999 + FEMA (Non-debt Instruments) Rules 2019; SHA — Shareholders' Agreement governed by ICA 1872

Common questions

Term sheet clauses, statute-cited.

What is a liquidation preference in an Indian term sheet?+

A liquidation preference gives preference shareholders the right to be paid the first ₹ out of an exit or winding-up before equity holders receive anything, commonly 1x non-participating in Indian rounds. It is a negotiated term in the shareholders' agreement and Articles; the Companies Act 2013 does not prescribe a standard preference, so the drafting defines the economics.

What is anti-dilution and how does it work?+

Anti-dilution adjusts the conversion ratio of preference shares (usually CCPS) when the company later issues equity at a lower valuation, protecting the investor's percentage. Indian term sheets typically use weighted-average anti-dilution rather than full-ratchet. The formula lives in the SHA, and the decoder walks you through the arithmetic and the Indian practice.

Are drag-along rights enforceable in India?+

Yes — drag-along clauses are enforced as ordinary contracts in India under the Indian Contract Act 1872, and they are standard in Indian SHAs. The clause lets majority investors force minority shareholders to sell their shares in an approved exit. The practical limit is statutory: minority holders cannot be forced into a transaction that breaches the Companies Act 2013.

What is a vesting schedule and what does a 4-year / 1-year cliff mean?+

Vesting is a contractual schedule that makes founder shares earn over time, typically 4 years with a 1-year cliff — no shares vest before the first anniversary, then 25% vests and the rest vests monthly. It is purely contractual under the Indian Contract Act 1872; the decoder compares the terms you're offered against what Indian founders typically sign.

Why is CCPS the standard instrument in Indian funded rounds?+

Compulsorily Convertible Preference Shares are issued under s.43(a) and s.55 of the Companies Act 2013 and are the standard instrument because they give investors a preference position while converting to equity at a defined trigger — unlike Optionally Convertible Preference Shares, there is no redemption or conversion choice. The decoder explains each clause against this instrument.