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). This distinction matters: founders can walk away from a term sheet before SHA is signed (subject to exclusivity penalty).

Valuation / Pre-money valuation

economics

The pre-money valuation determines the conversion price for CCPS and the FMV check for angel tax under s.56(2)(viib). If the investment is at a premium over Rule 11UA FMV and the company does NOT have DPIIT recognition, the premium is taxable as income in the company's hands.

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

VERIFY

Whether the term sheet valuation must be supported by a merchant banker valuation report to defend the angel tax position — CBDT Notification 6/2023 exempts DPIIT-recognised startups. For others, Rule 11UA requires FMV via merchant banker or DCF. Confirm timing: must valuation be done before closing or is a contemporaneous report acceptable?

Term sheets are not standardised in India. IVCA (Indian Venture Capital Association) publishes model documents. Key India-specific issues (CCPS structure, FEMA pricing, angel tax, 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 (not SAFEs or simple equity), (b) Companies Act restrictions, (c) FEMA pricing obligations for foreign investors, (d) angel tax exposure.
VERIFY

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, angel tax, 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 20(R) pricing) → deal may fail at closing
  • ⚠ Angel tax: no section on DPIIT recognition or valuation methodology → company may have unexpected tax liability
  • ⚠ 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 20(R); Income Tax Act 1961 (s.56(2)(viib) angel tax); SHA — Shareholders' Agreement governed by ICA 1872