5 Things Founders Must Do Before Signing a Term Sheet

A term sheet arrives and it feels like the moment you have been working toward. It is tempting to sign quickly, before the investor changes their mind. That instinct is exactly what experienced investors are counting on and exactly what gets founders into clauses they do not fully understand until they are enforced, years later.

1. Know which parts of the term sheet are actually binding

Most of a term sheet is deliberately non-binding except confidentiality and exclusivity, which usually are. Signing "just to keep talking" can still lock you out of other conversations for weeks, with real cost if the deal falls through.

Before you sign:

• Confirm which clauses are binding (typically confidentiality, exclusivity, sometimes break fees or expense provisions).
• Understand the exclusivity period and its implications for talking to other investors.
• Do not treat a term sheet as a "soft" document; it sets the tone and framework for the entire deal.

2. Understand what you are giving up with liquidation preference and anti-dilution

These clauses decide who gets paid first and how much, in an exit and they can mean founders and employees see very little even from a company that sold for a meaningful price. Read them as if the exit is happening tomorrow, not as a hypothetical.

Key points:

• Liquidation preference: Determines the order and amount of payout in an exit. A 2x non-participating preference is very different from a 1x participating one.
• Anti-dilution: Protects investors in down rounds, but can significantly dilute founders and employees. Understand the mechanism (full ratchet vs weighted average) and its impact.

Real pattern: Founders often focus on valuation and miss these terms. Later, they discover that in a modest exit, most of the proceeds go to investors, leaving little for the team.

3. Read the reserved matters list like it is a list of decisions you are giving away

Board and investor consent rights over hiring, spending and strategic decisions are normal, but the specifics vary widely and founders often do not realise how much day-to-day control they have signed away until they try to make a decision and can't.

Review the reserved matters carefully:

• Hiring/firing of key executives.
• Budget approvals and capex thresholds.
• Strategic decisions (pivots, M&A, new lines of business).
• Further fundraising or debt.

Negotiate for a list that protects investors without paralysing your ability to run the company.

4. Confirm the ESOP pool math before you agree to it

An ESOP pool topped up before a round is almost always dilutive to founders specifically, not to incoming investors because it is carved out of the pre-money valuation. This is negotiable. Most founders do not know that and do not ask.

Before you agree:

• Understand how the pool size affects your ownership.
• Confirm whether the pool is pre- or post-money.
• Negotiate if the proposed pool is larger than you need.

5. Match the SHA to the AOA -- In a mismatch, the AOA may win

Your shareholders' agreement can promise you all kinds of protections. If your Articles of Association are not amended to reflect them and a dispute ends up in court, the AOA is what usually governs, not the side agreement you thought protected you.

Ensure that:

• Key rights (veto, tag-along, drag-along, nomination rights) are appropriately reflected in the AOA.
• The SHA and AOA are consistent or the SHA explicitly addresses how conflicts are handled.
• Corporate approvals are obtained to amend the AOA as needed.

Real pattern: We often see SHAs with robust investor protections that are not mirrored in the AOA. In a dispute, this creates ambiguity and weakens enforceability.

And underneath all of it, the compliance clock is still running

A registered valuer's report is required before shares are issued at a premium. A foreign investor's allotment triggers an FC-GPR filing within a specified period. Miss it and the default carries reporting penalties and potential compounding liability, not a warning.

The fear worth having

A term sheet is written by the investor's lawyers, for the investor. Founders who negotiate it themselves are negotiating against people who do this for a living, over a document they may read once in their life.

Next in this series: The round closes and equity compensation for your team suddenly becomes a live decision and it is one of the most misunderstood areas in Indian startup law, for founders and employees alike.

Next: ESOPs Explained- What Founders and Employees Both Get Wrong

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