In India, How Has The Term Sheet Evolved?

A term sheet is a preliminary agreement reached between founders and investors following negotiations. There are a number of important business elements covered in this in-principle agreement, including the valuation. Term sheets have evolved significantly in India over the past few years, and understanding their evolution requires a detailed examination.

Formalizing the conversation and incorporating non-contractual agreements are included in the term sheet. A Definitive Agreement will be negotiated, agreed upon, and executed by the parties following execution of the Term Sheet. By enforcing these definitive agreements, a legal obligation is formally created. As a result, a term sheet does not bind the corporation to issue shares to the investor or bind the investor to invest.

Is there a reason why business owners have such a difficult time?

Due to the fact that these entrepreneurs are working with knowledgeable investors, the situation is complicated. Despite all of this, entrepreneurs will discover that the term sheet protects the rights and innocence of investors and their ownership. Investors who work with entrepreneurs have well-defined goals and tenets for making investments. Due to the fact that investors are responsible for handling other people’s money, they must allocate their funds with extra caution. Therefore, investors devise specific measures to protect themselves, and these concepts are reflected in contracts and term sheets.

India’s Term Sheet Evolution

If we observe the evolution of term sheets in India, we can see a different type of term sheet than the one-time reserve requirement with all money at par. An investor liquidation series and funding preference series were almost always used to determine the waterfall, with a minimum of 2X or even 3X. Especially in development rounds, double dipping was common.

Although large rounds of funding are currently being conducted at high valuations, a number of businesses may run afoul of the anti-dilution clause when valuation requirements adjust in response to changes in the external market. To prevent irreparable damage to a cap table, founders and early investors should guarantee a wide-ranging weighted average of the anti-dilution clause.

It is considered a fantastic endorsement by founders that their companies are popular. However, super pro-rata indicates that those who won’t lead or price the round have already received a significant share. Incoming investors have a hard time dealing with this clause.

The Employee Stock Ownership Plan (ESOP) pool has not been modified. ESOPs are not included in pre-money calculations since founders are solely responsible for them. As more and more companies go public, investors must estimate the price and founder equity upfront in the ESOP pool.

Due to the founders’ desire to have more control, voting rights and veto rights have also advanced, but they still need improvement. The number of special voting rights for founders is increasing, as are the preferences for founders in board composition. As a result of the transfer of power from investors, the reach of veto rights has also been reduced. When times are prosperous, investors may grant them if they are willing to let them go.

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