Last verified: 2026-05-05
In November 2015, a budget-hotel aggregator and a hostel-network startup signed a single document that read “non-binding except for confidentiality, exclusivity, governing law and approvals.” The two companies parted as collaborators. They reunited as litigants. The term sheet, the foundational document of term sheet drafting for Indian startups, was meant to bind nobody. It bound everyone for nine and a half years.
The target transferred its IP, its software, and its key employees in expectation of definitive agreements. The acquirer never signed them. Three years later, the target invoked arbitration. A sole arbitrator ruled in March 2021 that the term sheet had become binding through the parties’ conduct, awarding specific performance and directing the acquirer to execute the definitive agreements.
On 13 May 2025, the Delhi High Court set the award aside on public-policy grounds. The bench, hearing the matter as Oravel Stays Pvt. Ltd. v. Zostel Hospitality Pvt. Ltd., held that a document expressly stating it is non-binding, and contemplating execution of further definitive agreements, cannot by conduct alone be elevated into a contract.
Consensus ad idem on every material term, the court said, is the floor for specific performance.
On 29 July 2025, the Supreme Court refused to entertain Zostel’s special leave petition. A nine-and-a-half-year battle over a single 2015 term sheet ended where the drafter’s intent ought to have ended it: at the boundary between language that binds and language that does not.
Every clause in a term sheet sits on one of two sides of that line. Drafting a term sheet for an Indian startup, in 2026, is the act of drawing that line deliberately, in writing, under Indian contract law, the FEMA Non-Debt Instruments Rules 2019, the Companies Act 2013, SEBI’s revised Angel Fund framework of September 2025, and DPIIT’s February 2026 deep-tech recognition notification. The rest of this guide walks through how, clause by clause.
Term sheet drafting for Indian startups means structuring a preliminary investment document that complies with the FEMA Non-Debt Instruments Rules 2019, the Companies Act 2013, and the SEBI AIF Regulations. It typically covers valuation, ESOP pool, liquidation preference, anti-dilution, board composition and exit rights. Most clauses are non-binding except confidentiality, exclusivity, costs, governing law and conditions precedent.
That is the basic shape. The hard part is the choreography inside each word: pre-money math that hides an eight-percentage-point ESOP trap, anti-dilution maths that swing a founder’s stake by 12 to 20 percent in a down round, and FEMA reporting deadlines that deny relief if the closing checklist misses a single date.
What is a term sheet for Indian startups, and why it sits between an MoU and an SHA
For an Indian startup raising its first institutional round, the term sheet is the moment the deal becomes real on paper. It’s a 6-12 page document that fixes the commercial terms (price, instrument, board, exit) before the lawyers spend two months papering definitive agreements. It does not transfer money, shares, or, by default, an obligation to close. What it does is fix the terms on which the parties have agreed to negotiate further. Read iPleaders’ broader explainer on term sheets for the higher-level concept; this post is the drafting-specific spoke for Indian startup rounds.
The Indian deal sequence runs five documents long: NDA, term sheet, due-diligence completion, share subscription agreement (SSA) plus shareholders agreement (SHA) plus articles-of-association amendment, and FC-GPR filing within 30 days of share allotment if a foreign investor is on the cap table. Here is the document chain a senior corporate lawyer keeps on a single page:
| Document | Binding by default? | Stage in deal | India-specific legal note |
|---|---|---|---|
| NDA | Binding | Pre-term sheet (pre-DD) | Standard reciprocal NDA; survives termination 2-3 years |
| MoU | Presumptively non-binding | Strategic-collaboration discussion | Treated as preliminary unless drafted to bind |
| Term sheet | Mostly non-binding (5 binding exceptions) | Post-DD-readiness, pre-definitive | Binding clauses must be expressly carved out |
| SSA | Binding | Definitive | Conditions precedent, indemnities, FEMA pricing reps |
| SHA | Binding | Definitive | Reads onto the AoA; provisions inconsistent with the AoA may be unenforceable against the company |
A common founder mistake is to treat the term sheet as a non-event because “the real document is the shareholders agreement that follows.” That gets reality wrong twice. Once the term sheet is signed, the SHA is built around its commercial terms; what you negotiate here, the SHA inherits. And once exclusivity is signed, you’re contractually barred from running a parallel raise for the no-shop window. The term sheet is the negotiation; the SHA is the paperwork.
1Economic terms 2Control terms 3Exit and transfer terms 4Procedural and binding terms
Binding vs non-binding clauses: what the OYO-Zostel ruling means for your drafting
So is a term sheet legally binding in India? The default rule is no. Indian courts treat a term sheet as a preliminary document, presumptively non-binding, with five expressly binding exceptions: confidentiality, exclusivity (the no-shop), costs, governing law, and conditions precedent. This is industry convention, codified in every Indian VC term sheet template since the mid-2010s. Read when a term sheet becomes legally enforceable for the broader doctrine; this section walks the post-2025 drafting line.
The doctrinal anchor is Section 10 of the Indian Contract Act, 1872: an agreement is a contract only if there is consensus ad idem, lawful consideration, and competent parties. A term sheet that expressly disclaims binding effect (other than the carve-outs) does not satisfy consensus ad idem on the substantive deal terms, only on the binding exceptions.
That is the foundation the Delhi High Court relied on in Oravel Stays Pvt. Ltd. v. Zostel Hospitality Pvt. Ltd., 2025 SCC OnLine Del 3377 when setting aside the Zostel arbitral award; read the Delhi High Court’s 13 May 2025 judgment in the OYO-Zostel matter and the Supreme Court’s 29 July 2025 refusal to entertain Zostel’s SLP for the post-2025 position.
Which clauses are always binding by industry convention
The five binding exceptions are drafted as a single carve-out paragraph at the bottom of the Indian term sheet: confidentiality (information exchanged during DD survives termination), exclusivity (typically 45-90 days), costs (each side bears its own; sometimes a break-fee on bad-faith withdrawal), governing law and dispute resolution (almost always Indian law, with arbitration seated in Mumbai, New Delhi, or Singapore), and conditions precedent (the closing checklist embedded in the term sheet).
What “non-binding” really means under Indian contract law
Historically, Indian courts had sometimes leaned toward enforcing pre-contract documents where one party had performed substantially, drawing on the doctrine of part performance. The OYO-Zostel ruling consolidates the post-2025 position: an express non-binding clause is treated as a hard ceiling unless the conduct supports a fresh, separate agreement. The drafting consequence is that a clear, well-placed binding/non-binding paragraph is now stronger than it was a decade ago.
Drafting takeaway: how to write the binding/non-binding line cleanly
Three drafting moves protect the founder. First, place the binding/non-binding paragraph at the head of the term sheet, not buried in clause 14 of 18. Second, list the binding exceptions exhaustively and add “to the exclusion of all other provisions.” Third, repeat the carve-out at the foot of every economic and control clause that should not bind (“This clause is non-binding and subject to the parties executing definitive agreements”). It looks ugly. It works.
A common question founders raise is whether emails and WhatsApp exchanges during DD can convert a non-binding term sheet into a binding contract. The post-OYO-Zostel answer is: not unless the messages themselves form an independent agreement on every material term. Routine DD exchanges do not. Asset transfers in expectation of closing, on the careful reading of the May 2025 ruling, do not either. What can are signed amendments to the term sheet that drop the non-binding language.
The pitfall worth flagging: pulling out after signing is not free. Exclusivity bars a parallel raise; break-fee clauses, where included, are enforceable; and reputational cost is real in a market where founders and lead investors recur across rounds.
The Indian regulatory overlay every term sheet must navigate
Every term sheet for an Indian startup lives with a regulatory overlay no US guide will mention. FEMA NDI Rules govern pricing if the cap table includes a foreign investor. The Companies Act 2013 governs the form of the instrument. The SEBI AIF framework governs domestic-fund investors.
DPIIT recognition unlocks Section 80-IAC tax benefits and (until FY 2025-26) angel-tax exemption. Press Note 3 of 2020 imposes government consent for investors from land-bordering countries. MCA’s amended Rule 25A creates a fast-track reverse-merger route.
| Statute / rule | Section / rule no. | What it controls | Touchpoint in the term sheet |
|---|---|---|---|
| FEMA (Non-Debt Instruments) Rules, 2019 | Rules 2, 9-12, Schedule I | Pricing, mode, reporting for non-resident investments | Valuation clause; pricing certificate; reporting timelines |
| Companies Act, 2013 | Section 42 | Private placement procedure | PAS-3, PAS-4, PAS-5 references |
| Companies Act, 2013 | Section 55 | Issuance of preference shares | CCPS clause; conversion mechanic; redemption |
| Companies Act, 2013 | Section 62 | Rights issue and preferential allotment | Allotment procedure; existing-shareholder rights |
| SEBI AIF Regulations + September 2025 framework | Regulation 19A (Angel Fund) | Investment by domestic angel funds | Investor identification; min/max ticket size |
| DPIIT Gazette Notification G.S.R. 108(E) | 4 February 2026 (deep-tech) | Recognition extended to 20 years; INR 300 crore turnover ceiling for deep-tech | Eligibility for convertible notes; 80-IAC reps |
| Press Note 3 of 2020 | Clause 3.1.1 (FDI policy) | Government route for investors from land-bordering countries | India-specific reps |
| MCA Rule 25A (amended September 2024) | Rule 25A, Companies (CAA) Rules | Fast-track inbound reverse merger | Redomicile reps and warranties |
FEMA NDI Rules 2019: pricing, mode, and reporting
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 regime governs every transaction where shares move between residents and non-residents. Resident-to-non-resident transfers must be priced no lower than fair market value certified by a registered valuer or merchant banker. Non-resident-to-resident exits must be priced no higher than fair market value. CCPS conversions follow the same logic at the conversion event.
FC-GPR (primary issuance) and FC-TRS (secondary transfers) report within 30 days. The drafting touchpoint is the valuation clause and the conditions-precedent block; in practice, founder-drafted templates often omit both, which is how a 30-day closing slips by two weeks while the certificate (1-2 weeks, INR 25,000 to INR 1,00,000) is being procured.
Companies Act 2013: sections 42, 55, 62
Section 42 of the Companies Act, 2013 codifies private placement procedure: PAS-3, PAS-4, PAS-5 forms; identified persons (max 200 in a financial year, excluding QIBs and ESOP employees); subscription money to a separate bank account until allotment. Section 55 of the Companies Act, 2013 governs preference shares; the “compulsorily convertible” feature exempts CCPS from the 20-year redemption rule and keeps the instrument inside the equity bucket for FEMA. Section 62 of the Companies Act, 2013 is the rights-issue and preferential-allotment provision; most Indian rounds run as preferential allotments under section 62(1)(c), which requires a special resolution, a registered-valuer report, and a 12-month cooling-off period.
SEBI AIF, the September 2025 Angel Fund framework, DPIIT, Press Note 3
SEBI’s revised Angel Fund framework, September 2025 restructured Category I AIF rules: an INR 10 lakh to INR 25 crore investment band per investee, accredited-investor-only onboarding, and pro-rata pari-passu rights for AIF investors in syndicates. The drafting consequence is that angel-round term sheets now identify the investor entity (angel fund vs SPV vs HUF vs individual) more precisely, because the cheque-size band and protection package shift with the entity type.
DPIIT recognition continues to gate convertible-note eligibility (under the 2016 amendment to the Companies (Acceptance of Deposits) Rules). The DPIIT Gazette Notification G.S.R. 108(E) dated 4 February 2026 formally defined Deep Tech Startups as a sub-category, extended their recognition tenure from 10 to 20 years, and raised the turnover ceiling for deep-tech entities to INR 300 crore (regular startups moved to INR 200 crore).
Press Note 3 of 2020 imposes government consent on FDI from any country sharing a land border with India; the 2026 partial relaxation, for sub-10% non-controlling investments, narrows but does not remove the headline reps. The MCA’s amended Rule 25A reverse-merger fast-track route, notified by MCA G.S.R. 555(E) dated 9 September 2024, cut the cross-border reverse merger timeline from 8-12 months to roughly 90-120 days.
Choosing the instrument: CCPS vs CCD vs convertible note vs iSAFE
The first drafting choice is the instrument. Get it wrong, and the rest of the term sheet is structurally misaligned. Four live options exist: compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCD), convertible notes (DPIIT-recognised startups only), and iSAFE notes.
A worked example: a INR 3 crore angel cheque into a pre-revenue Indian startup. Under CCPS, the founder issues preference shares with a fixed conversion ratio at the next priced round, plus a discount or valuation cap. Under CCD, the founder issues a debenture with a coupon (usually 0%) that converts at the priced round. Under a convertible note, the founder issues an instrument that is debt until conversion (5-10 year tenor under the 2016 rules). Under iSAFE, the founder issues a CCPS-structured template note modelled on the US SAFE but adapted to sections 42, 55, and 62.
| Instrument | Issuer eligibility | FEMA treatment | Conversion mechanic | Typical use case |
|---|---|---|---|---|
| CCPS | Any private limited company | Equity instrument; FC-GPR within 30 days | Auto-convert at next priced round | Series A and later priced rounds |
| CCD | Any private limited company | Equity instrument (if compulsorily convertible) | Coupon-bearing debenture, converts at priced round | Bridge rounds, debt-flavoured tranches |
| Convertible note | DPIIT-recognised startups only | Debt until conversion; equity on conversion | 5-10 year tenor; converts at priced round | Pre-Series A bridge for DPIIT-recognised |
| iSAFE | Any private limited company | CCPS-structured for FEMA equity | Discount or valuation cap; converts at priced round | Angel and rolling-close rounds |
CCPS: the default for Series-stage rounds
The CCPS is the default for any Series A or later round. It satisfies section 55 (compulsory conversion exempts it from the 20-year redemption rule), satisfies FEMA NDI Rules 2019 (equity instrument, FC-GPR within 30 days), and preserves the preference rights institutional investors expect. The clause typically specifies the conversion ratio (1:1 default at issuance, adjusted by anti-dilution), the conversion event triggers, and the dividend rate (usually 0.0001% to satisfy section 55’s nominal-dividend requirement).
CCD: the debt-flavoured cousin
A CCD is a debenture compulsorily convertible into equity. Because compulsorily convertible, it is treated as equity under FEMA NDI. The use case is a bridge round where the investor wants a coupon during the bridge but accepts equity conversion at the priced round, or a structured tranche where part of the cheque comes as debt-flavoured paper. A CCD is rarely the right instrument for a pure equity round.
Convertible notes (DPIIT-recognised only) and iSAFE
Convertible notes were introduced for DPIIT-recognised startups by the MCA’s 29 June 2016 amendment to the Companies (Acceptance of Deposits) Rules. The minimum ticket is INR 25 lakh; the original 5-year tenor was extended to 10 years. iSAFEs are commonly structured as CCPS so that the issuance follows the private-placement and preference-share rules; the actual instrument issued at signing is a CCPS template aligned with iSAFE economics. The pitfall is mixing instruments in a single round. Pick one.
Drafting the economic terms: valuation, ESOP pool, liquidation preference, anti-dilution
The economic clauses are where the deal’s money math lives. Get them right and the founder retains both control and upside; get them wrong and the founder discovers, at the next round, that the ownership stake everyone agreed on in conversation is 8 to 12 percentage points lower on paper. Four clauses do most of the work: valuation (pre-money vs post-money), ESOP pool (and where it sits), liquidation preference, and anti-dilution.
Pre-money vs post-money valuation and the ESOP pool trap
If a Series A investor offers INR 30 crore at INR 120 crore pre-money, post-money is INR 150 crore and the investor takes 20% of the cap table. Simple maths.
The trap is the ESOP pool. Investors typically require a 10-15% ESOP pool before the round closes, structured as part of the pre-money cap table. If the company has no existing ESOP, the founder is asked to create the pool from existing equity, which dilutes the founder by the full pool size. On a pre-money 10% ESOP top-up, the founder hands over an additional 8 percentage points of equity that would otherwise have been split between investor and founder if the ESOP had been structured post-money.
The drafting fix is in two words: the ESOP pool of [10%] of the post-money capitalisation shall be created post-completion. That single shift moves the dilution from the founder to the post-money cap table, costing the investor roughly 1.6 to 2 percentage points. This is the most commonly miss-negotiated clause in Indian seed and Series A term sheets.
Liquidation preference: 1x non-participating, 2x participating, capped participating
Three structures are common. 1x non-participating (the investor gets back its money first, then the remainder is distributed pro rata; the investor chooses the better of preference or pro-rata). 2x participating (the investor gets 2x its money first, then participates pro rata in the remainder). Capped participating (participation up to a 2x or 3x cap).
The 2021 Indian VC market normalised on 1x non-participating, the founder-friendly default. The 2022-2024 funding winter brought 2x participating back into mainstream Indian term sheets. As of May 2026, 1x non-participating is still the modal structure for clean rounds, but 2x participating has reappeared in a meaningful minority of Series A term sheets, particularly with hedge-fund-flavoured crossover investors. On a INR 100 crore exit, an investor with 20% on 1x non-participating walks with INR 20 crore; with 2x participating on a INR 30 crore cheque, INR 68 crore. The founder delta is roughly 60% on the same deal.
Anti-dilution: weighted average vs full-ratchet (worked example)
Anti-dilution protection in shareholders agreements takes two flavours: broad-based weighted average (the investor-friendly market default) and full-ratchet (an aggressive structure that re-prices the preference shares to the down-round price).
| Scenario | Investor entry price | Down-round price | Conversion ratio (weighted average) | Conversion ratio (full-ratchet) | Founder dilution delta |
|---|---|---|---|---|---|
| Series A at INR 100 / CCPS, 30 lakh CCPS issued, INR 50 crore raised; down round at INR 50 / CCPS, 20 lakh CCPS issued, INR 10 crore raised | INR 100 | INR 50 | New conversion price ~INR 84.6; new ratio ~1.18:1 | New conversion price = INR 50; new ratio = 2:1 | Full-ratchet is ~10-12 percentage points worse than weighted average |
Insist on broad-based weighted average. If the investor pushes for full-ratchet, negotiate two safeguards: a sunset clause (full-ratchet expires after 18-24 months) and pay-to-play (investors who do not pro-rate in the down round lose anti-dilution protection).
Pay-to-play and structured-deal language post-2022
Pay-to-play conditions an investor’s anti-dilution and other preference rights on participation in subsequent rounds. Investors who do not participate in a down round lose preference protection and convert to common stock. This was rare in Indian term sheets in 2018-2021. The post-2022 funding winter brought it back, particularly at Series B and later, alongside structured-deal language (preference cleansing, milestone-based tranches).
The 2026 second-order signal: representations and warranties insurance is starting to enter the Indian seed and Series A market. R&W insurance reduces founder personal indemnity exposure but adds underwriting reps to the term sheet. Practitioners expect the next 18-24 months to see R&W carriers building India-specific seed-stage products.
Drafting the control terms: board composition, protective provisions, founder vesting, leaver clauses
Control terms decide who runs the company between rounds. Four clauses dominate: board composition, protective provisions (the 18-25 reserved-matters list), founder vesting (typically 4 years, 1-year cliff), and leaver definitions.
Board composition and observer rights
A typical Series A board has 5 seats: 2 founder, 2 investor, 1 independent. As more rounds close, the board expands to 7 or 9. Founders quickly lose voting majority on the board, even before they lose voting majority on the cap table. Observer rights are the lever for investors below the board-seat threshold (no vote, full information rights).
The principle established in V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160 is that any clause in an SHA imposing share-transfer or governance restrictions must be reflected in (or at least not contradict) the company’s Articles of Association to bind the company. Make every control clause AoA-mirror-able.
Protective provisions / reserved matters: how to negotiate the list down
Protective provisions are the list of corporate decisions requiring investor consent in addition to ordinary board approval. The typical Indian Series A list runs 18-25 items: change of business, sale of the company, IPO, dividend, additional issuance, related-party transactions, hiring/firing of senior officers, capex above a threshold, indebtedness above a threshold, and so on.
The founder-side move is twofold: cap each threshold high enough that ordinary operations don’t require investor consent (a INR 5 crore capex threshold paralyses a INR 50 crore-revenue startup; INR 25 crore doesn’t), and split the list into “investor consent required” vs “investor information required.” Information rights are cheap; consent rights are expensive. Three protective provisions to refuse: (1) any cap on founder remuneration; (2) consent rights over hiring junior employees; (3) consent rights over operational marketing or product decisions.
Founder vesting and reverse vesting: good leaver vs bad leaver
Founder vesting (also called reverse vesting) makes a founder’s existing equity subject to a vesting schedule after the round closes. Typical structure: 4 years total, 1-year cliff, monthly thereafter. If the founder leaves before vesting completes, the company has a buy-back right over the unvested shares.
Leaver definitions decide the buy-back price. A good leaver (death, disability, termination without cause) is bought back at fair market value. A bad leaver (resignation without cause, termination for cause, breach of non-compete) is bought back at par value or cost. The drafting fight is over the bad-leaver definition: investors push for wide (any voluntary departure), founders push for narrow (only termination for cause and breach of restrictive covenants). The 2022 BharatPe co-founder dispute exposed how thin Indian founder-vesting clauses had become; post-2022 templates routinely tightened bad-leaver triggers, non-compete and non-solicit clauses, and termination-for-cause definitions.
Drafting the exit and transfer terms: drag-along, tag-along, ROFR, ROFO, put options
Exit and transfer clauses decide how, and at what price, equity changes hands after the round closes. Five clauses do the work: drag-along, tag-along, right of first refusal (ROFR), right of first offer (ROFO), and put options for foreign investors.
Drag-along triggers, thresholds, and exit price
Drag-along gives the majority the right to force the minority to sell on the same terms. The drafting choices are the trigger threshold (51%, 66%, or 75% of the cap table), the price floor (typically 1x or 2x the most recent round price), and the founder consent. Investor-friendly default: 51%. Founder-friendly default: 75% with mandatory founder consent. See drag-along and tag-along rights enforceability in India for how the Section 58 of the Companies Act, 2013 line of authority backs transfer-restriction clauses.
Tag-along, ROFR and ROFO: the founder’s transfer-restriction toolkit
Tag-along is the inverse: a minority’s right to ride along on a majority sale. Standard tag-along runs 100% pro rata. ROFR lets the company or shareholders match a third-party offer; ROFO lets them make a first-offer bid before the transferor solicits third-party bids. ROFO is more transfer-friendly (a third-party buyer is more willing to bid against ROFO than against ROFR’s contingent over-bid risk). Institutional rounds usually take ROFR; angel and seed rounds take ROFO or a hybrid.
Put options for foreign investors: drafting around the FEMA pricing constraint
Put options give a foreign investor the right to sell its shares back at a pre-specified price or formula. The constraint is FEMA NDI Rules 2019 pricing: the put-option exit price cannot exceed fair market value at the time of exit. That is the constraint Cruz City 1 Mauritius Holdings v. Unitech Ltd., (2017) 239 DLT 649 addressed; foreign-seated arbitral awards on put-option valuation are enforceable in India, but the underlying price must comply with FEMA at payment time.
The drafting fix is a put-option clause triggered on a specified event (missed exit timeline, IPO failure, breach of investor covenants) at a price formula tied to fair market value plus a minimum IRR (10-15%), with explicit “subject to applicable FEMA pricing guidelines” language.
Draft put options as outcome-protection clauses, not return-guarantee clauses; the latter is a foreign-judgment-enforcement headache that the inter-shareholder-contract reasoning in M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd., (2004) 9 SCC 204 on the Section 58(2) transferability proviso does not cure.
Drafting the procedural and binding clauses
Procedural clauses are the rails on which the deal closes. Five clauses do the work: confidentiality, exclusivity / no-shop, governing law and jurisdiction, arbitration seat and rules, and conditions precedent. These are the clauses the OYO-Zostel ruling expressly preserved as binding even where the substantive economic clauses were not.
Confidentiality and exclusivity: the always-binding pair
Confidentiality survives the term sheet for 2-3 years post-termination, with carve-outs for information already public, independently developed, or disclosed under regulatory compulsion. Exclusivity / no-shop typically runs 45-90 days. Senior corporate counsel push back on 90-day exclusivity for two reasons: it removes optionality during the busiest part of due diligence, and it weakens the founder’s bargaining position if terms drift during DD. Across early-stage Series A advisory engagements, the modal exclusivity clause is 60 days with one 15-day extension by mutual consent, tied to specific DD and document-circulation milestones.
Governing law, seat, and arbitration: where Indian VC has settled
For India-incorporated cap tables, governing law is almost always Indian law. The arbitration seat is more contested. Three choices: Mumbai (financial hub), New Delhi (regulatory hub), and Singapore (international neutral).
Singapore-seated SIAC is common where one or more investors are foreign funds or the cap table involves a Singapore SPV. Mumbai-seated MCIA is the domestic default. For pure-domestic rounds, Mumbai-seated MCIA is the cleaner choice; the foreign-seat is unnecessary cost. For mixed cross-border rounds, Singapore-seated SIAC is the practical default.
Conditions precedent: the closing checklist embedded in the term sheet
A standard Indian Series A CP block includes: completion of due diligence; receipt of regulatory approvals (CCI if thresholds met, RBI for foreign-bank deals, sectoral approvals); execution of the SSA, SHA, AoA amendment; founder vesting agreements signed; ESOP pool created; and registered-valuer certificate issued. Make CPs specific and time-bound. “Receipt of approvals” without a deadline is an open-ended escape hatch; “Receipt of approvals within 60 days of term sheet execution, failing which either party may terminate” is enforceable.
Drafting India-specific reps and warranties
Indian term sheets carry three categories of reps and warranties no US Series A term sheet typically includes: Press Note 3 reps, founder personal indemnity (the asymmetry vs US practice), and reverse-flip / redomicile reps that became standard in 2024-2026.
Press Note 3 reps for investors from land-bordering countries
A standard Press Note 3 rep block runs four sentences: the investor confirms it is not, directly or indirectly, beneficially owned by an entity from a land-bordering country; confirms its ultimate beneficial owners’ jurisdictional status; agrees to provide updated reps if the structure changes; and indemnifies the company for any consequences of a misrepresentation. The 2026 partial relaxation (sub-10% non-controlling investments) does not remove the headline reps. Draft the reps narrowly (focus on direct and beneficial ownership, not LP-level penetration) and keep the indemnity capped at the investment amount.
Founder personal indemnity: the India asymmetry vs US practice
US Series A term sheets, modelled on the National Venture Capital Association template, rarely include founder personal indemnity. Indian term sheets routinely include it for breach of fundamental warranties (title, capitalisation, no-conflict) and sometimes for tax warranties. The asymmetry is structural: Indian founders often hold a high percentage of the cap table in their first round, so the company’s balance sheet doesn’t carry enough net worth to backstop a fundamental-warranty breach.
Across cross-border Series A and bridge rounds, the founder indemnity package commonly settles in this band: 25-30% of the investment as a hard cap for general warranties, 100% (capped at investment) for fundamental warranties, 18-24 month survival for general, indefinite survival for fundamental, with a basket and de minimis structure that keeps small claims out of the indemnity loop. That is the package founders should target; the alternative (uncapped, unsurvived, no-basket) is what lands a founder in personal-asset-attachment risk if a stale tax assessment surfaces post-closing.
Reverse-flip / redomicile reps: the 2024-2026 standard
Between 2024 and 2025, multiple Indian-origin startups completed reverse-flip mergers from Singapore, Delaware, or the Cayman Islands back into India: Pine Labs and Groww in May 2024, Razorpay in May 2025, Zepto in early 2025. The September 2024 amendment to MCA Rule 25A cut the cross-border reverse-merger timeline from 8-12 months to 90-120 days.
The drafting consequence is that 2024-2026 Indian rounds routinely include redomicile reps: full disclosure of any prior or contemplated foreign-domicile structure; FEMA compliance history (no pending contraventions, all required filings made); capital-gains-tax exposure on prior flips (to forestall the PhonePe-style tax surprise where a 2022 Singapore-to-India flip generated a USD 1 billion capital-gains liability); and covenants requiring the founder to support a future inbound flip if the investor mandates one for IPO readiness. Include the reps even if a flip is not currently contemplated.
2024-2026 regulatory updates that change how you draft this year
The Indian regulatory environment for startup fundraising changed in five places between July 2024 and February 2026. Every one of those changes touches a drafting decision.
Angel tax: from 2012 introduction to FY 2025-26 abolition
Angel tax was Section 56(2)(viib) of the Income-tax Act 1961, introduced 1 April 2012, treating above-fair-market-value share premium as taxable income for the issuing company. The April 2019 partial exemption for DPIIT-recognised startups narrowed the burden; the 2023 expansion brought non-residents into scope; the Union Budget of July 2024 abolished it for all investor classes with effect from FY 2025-26 (1 April 2025). Term sheets no longer engineer around FMV thresholds, no longer need angel-tax indemnities, and no longer need DPIIT recognition as a defensive shield against angel-tax liability.
SEBI Angel Fund framework: what changed in September 2025
SEBI’s revised Angel Fund framework, notified September 2025, restructured Category I AIF (Angel Funds) along three dimensions: an investment band of INR 10 lakh to INR 25 crore per investee, accredited-investor-only onboarding, and pro-rata pari-passu rights for AIF investors in syndicates. Smaller cheques (below INR 10 lakh) move out of the angel-fund channel into individual or family-office structures, which carry weaker rep-and-warranty packages.
DPIIT 2026 deep-tech notification and Rule 25A fast-track reverse merger
DPIIT’s February 2026 notification recognised “Deep Tech Startups” as a sub-category, extended recognition tenure from 10 to 20 years, and raised the turnover ceiling to INR 300 crore. The MCA’s amended Rule 25A (notified September 2024) cut the cross-border inbound reverse merger timeline from 8-12 months to roughly 90-120 days. Pine Labs, Groww, Razorpay and Zepto reverse-flipped within a 14-month window; redomicile reps are now standard rather than optional.
Common drafting mistakes Indian founders make
Six recurring mistakes account for most founder-side losses. Each is preventable with a short corrective.
The first is signing exclusivity longer than 60 days. Cap exclusivity at 60 days with one 15-day mutual extension, tied to DD and document-circulation milestones. The second is accepting a pre-money ESOP top-up without modelling the dilution. Insist on post-money ESOP creation, or bake the pre-money pool into the headline pre-money valuation explicitly. The third is accepting full-ratchet anti-dilution without a sunset; insist on broad-based weighted average, failing which full-ratchet with an 18-24 month sunset and pay-to-play.
The fourth is signing personal indemnity without a cap, survival, or carve-outs; insist on the 25-30% cap, 18-24 month survival, basket-and-de-minimis structure described above. The fifth is omitting a “fund-only” representation for foreign investors (no LP-level mainland-China exposure for Press Note 3); the four-sentence rep block is the corrective. The sixth is treating “non-binding” as a magic phrase that survives bad drafting; the corrective is the placement and repetition of the binding/non-binding paragraph.
The senior corporate counsel pushback list runs in parallel: cap exclusivity at 60 days; resist 2x participating preference unless it sunsets; resist full-ratchet without sunset; insist on broad-based weighted average; cap general warranty indemnity at 25-30% of investment; survive at 18 months for general, indefinitely for fundamental. These are not secret negotiation moves; they are common investor-side practice across post-2022 Indian Series A rounds.
Founder-side drafting workflow, step by step
The 30-day workflow from term-sheet draft 1 to FC-GPR filing breaks into eight steps. Each has an artefact, a regulatory checkpoint, and a typical owner.
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Decide instrument (CCPS, CCD, convertible note, or iSAFE) based on round stage, DPIIT recognition status, and investor mix. CCPS for Series A and later; convertible note only if DPIIT-recognised and the cheque is at least INR 25 lakh; iSAFE for angel rounds with template-driven speed.
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Lock pre-money valuation methodology and obtain the RBI-aligned valuation certificate from a registered valuer or merchant banker if a foreign investor is on the cap table. Typical timeline: 1-2 weeks. Typical fee: INR 25,000 to INR 1,00,000. Required for FEMA pricing compliance.
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Draft the economic terms: cheque size, pre-money valuation, ESOP pool size and location, liquidation preference, anti-dilution (broad-based weighted average preferred). Budget 3-4 days for the redline cycle.
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Draft the control terms: board composition, observer rights, protective provisions (cap thresholds high), founder vesting (4 years, 1-year cliff), good leaver / bad leaver definitions.
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Draft the exit and transfer terms: drag-along (75% threshold preferred), tag-along (full pro-rata), ROFR or ROFO, put options for foreign investors with FEMA pricing compliance language.
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Draft the India-specific reps: Press Note 3 reps for foreign investors, founder personal indemnity (capped at 25-30% of investment, 18-24 month survival), reverse-flip / redomicile reps.
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Add the procedural binders: confidentiality (2-3 year survival), exclusivity (60 days with one 15-day mutual extension), governing law (Indian law), arbitration (Mumbai MCIA for domestic, Singapore SIAC for cross-border), conditions precedent (specific and time-bound).
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Build the closing checklist: AoA amendment to mirror the SHA, MGT-14 filing for board and special resolutions, the share subscription agreement executed alongside the SHA, and FC-GPR filing within 30 days of share allotment if a foreign investor is on the cap table.
The two stages where most founders blow the schedule are stage 3 (the valuation certificate, which often takes longer because the valuer has a queue) and stage 8 (the FC-GPR filing, where the Authorised Dealer bank often comes back with documentation queries that take a week to resolve).
The drafting convention in Indian VC is that the lead investor’s counsel produces the first draft of the term sheet and the founder’s counsel redlines. In angel and rolling-close seed rounds, founders increasingly draft their own template to send to angels because the speed advantage (5 days vs 15) outweighs bespoke drafting at every cheque.
The future of term sheet drafting in India: 2026-2030 outlook
Five forward signals are visible in the May 2026 reference window. None is decisive on its own; together, they point to a structural shift over the next 24-48 months.
The first signal is platform-mediated drafting. Cap-table SaaS players (EquityList, AngelList India, incoming Carta India entrants) are pushing toward semi-templated term sheets stored on platforms with versioning and one-click signature; the drafting cycle compresses from two-week email loops to 5-7 day platform workflows.
The second signal is the accredited-investor onboarding ripple from the September 2025 SEBI Angel Fund framework. Accredited-only onboarding tightens upstream syndicate composition and pushes smaller cheques back into structured-angel-fund channels rather than informal SPVs.
The third signal is AI-enabled clause-deviation diagnostics. Founders and counsel are increasingly using AI tools to flag deviations from market norms before negotiation; aggressive clauses get spotted earlier and renegotiated faster.
The fourth signal is the reverse-flip rep becoming standard. With at least 8-10 unicorns reverse-flipping in 2024-2025, term sheets for 2026-2028 rounds will routinely require representations on entity structure, FEMA compliance history, and capital-gains-tax exposure on prior flips. The next iteration is to convert them into covenants (forward-looking obligations) rather than reps (point-in-time statements).
The fifth signal is earlier-stage pay-to-play. As 5%+ of all VC rounds globally are down rounds (PitchBook 2025), Indian term sheets at Series A and Series B will start including templated pay-to-play and preference-cleansing language earlier in the deal lifecycle. The downstream consequence: representations and warranties insurance, common in Indian M&A above INR 500 crore, is moving downstream to seed and Series A. Founder personal indemnity exposure may compress over 2026-2028 as insurance backstops the founder’s recovery exposure.
Frequently asked questions on term sheet drafting for Indian startups
1. Is a term sheet legally binding in India?
The default rule is no. A term sheet is treated as a preliminary, presumptively non-binding document under Indian contract law, with five expressly binding exceptions: confidentiality, exclusivity, costs, governing law, and conditions precedent. The May 2025 Delhi High Court ruling in the Oravel Stays / Zostel matter, and the Supreme Court’s July 2025 dismissal of the SLP, consolidate the post-2025 position that an express non-binding clause is hard to elevate into a binding contract by conduct alone.
2. What is the difference between a term sheet and a Letter of Intent (LoI) in India?
A Letter of Intent is broader and more frequently used in M&A and strategic-collaboration discussions; it can cover confidentiality, exclusivity, indicative pricing, and a roadmap to definitive documents. A term sheet is narrower and clause-specific, typically used for fundraising, and reads as a clause-by-clause headline of the eventual SSA and SHA. Indian courts treat both as preliminary unless drafted to bind.
3. What is the difference between a term sheet and a Memorandum of Understanding (MoU)?
An MoU usually expresses intent to cooperate or collaborate, often without specific commercial commitment. A term sheet sets out specific commercial terms (price, instrument, board, exit) ahead of the definitive agreements. Both are presumptively non-binding under Indian contract law, with binding carve-outs that the parties draft in expressly.
4. What is the difference between a term sheet and a Shareholders Agreement (SHA)?
The term sheet is the precursor; the SHA is the definitive, binding contract that follows due diligence. The SHA mirrors and expands on the term sheet’s economic, control, and exit clauses, and is reflected in the company’s articles of association on closing. The term sheet does not transfer shares; the SHA, paired with the SSA and the AoA amendment, does.
5. What is the difference between a term sheet and a Share Subscription Agreement (SSA)?
The SSA is the contract that effectuates the investment in exchange for shares; the term sheet outlines the terms; the SSA, the SHA, and the AoA amendment together close the round. The SSA carries the conditions precedent, the closing mechanics, the founder reps and warranties, and the indemnity package. The term sheet’s economic and control clauses migrate into the SSA and SHA on signing.
6. Should the founder or the investor draft the term sheet?
Conventionally, the lead investor produces the first draft and the founder’s counsel redlines. In rolling-close angel rounds, founders increasingly draft their own template to send to angels, because the 5-day vs 15-day speed advantage outweighs the cost of standardised drafting. For Series A and later, the lead investor’s counsel almost always drafts first; the founder’s leverage sits in the redline.
7. How long does it take to negotiate a term sheet in India?
The typical range is 2-6 weeks for institutional Series A rounds and 1-2 weeks for rolling-close angel rounds. Cross-border rounds take longer, because Press Note 3 reps, FEMA valuation certificates, and FC-GPR planning add to the closing checklist. The 30-day total timeline (term sheet to FC-GPR) is achievable but tight; most founders should plan 45-60 days from term sheet to closing.
8. What happens if I sign a term sheet and pull out before signing definitive agreements?
Generally, there is no enforceable obligation to close, because the substantive economic and control clauses are non-binding. Three exceptions matter: exclusivity (binds the founder against parallel raises), break-fee clauses (where included), and conduct-led estoppel (the OYO-Zostel risk if conduct supplies a fresh consensus ad idem). Pulling out is not free, even if the substantive clauses do not bind.
9. What is the standard format of an Indian startup term sheet?
A 6-12 page document with: parties (company, founder, investor); valuation (pre-money, post-money, ESOP); economic terms (instrument, liquidation preference, anti-dilution, dividend); control terms (board, protective provisions, founder vesting); exit terms (drag-along, tag-along, ROFR, put options); India-specific reps (Press Note 3, founder indemnity, reverse-flip); procedural / binding clauses (confidentiality, exclusivity, governing law, arbitration); and conditions precedent.
10. Do I need DPIIT recognition before signing a term sheet?
Not strictly; a startup can sign a term sheet without DPIIT recognition. But DPIIT recognition unlocks Section 80-IAC tax benefits and (until FY 2025-26) angel-tax exemption, and it enables convertible notes as an instrument under the 2016 MCA notification. In practice, founders pursuing institutional rounds should obtain DPIIT recognition as a parallel workstream to term-sheet drafting; the recognition is free and the application takes 7-14 days.
11. What is angel tax and is it still a problem after the 2024 abolition?
Angel tax was Section 56(2)(viib) of the Income-tax Act 1961, which treated above-fair-market-value share-issuance premium as taxable income in the hands of the issuing startup. The Union Budget of July 2024 abolished angel tax for all classes of investors with effect from FY 2025-26. New term sheets no longer need to engineer around FMV thresholds, but historical angel-tax exposure (for issuances pre-1 April 2025) remains relevant in due diligence.
12. Can the investor force me to sell my company under drag-along?
Yes, if the drag-along thresholds are met and the AoA backs the clause, the investor can force the founder to sell on the same terms as the majority. Founders should negotiate a high threshold (75% rather than 51%), an exit-price floor (1x or 2x the most recent round price), and mandatory founder consent above the threshold. The drag-along is the single most powerful exit clause in the Indian VC term sheet.
13. CCPS vs CCD vs SAFE / iSAFE: which to use in my term sheet?
CCPS for Series A and later priced rounds; CCD for bridge or debt-flavoured rounds where the investor wants a coupon; convertible notes only for DPIIT-recognised startups with cheques of INR 25 lakh and above; iSAFE for angel and rolling-close rounds where template-driven speed matters. Pick one instrument per round; mixing instruments in a single round is a structural drafting error.
14. iSAFE vs convertible note vs CCPS: Indian comparison
iSAFE is template-based and CCPS-structured to satisfy Companies Act sections 42, 55, and 62; it converts at the next priced round at a discount or valuation cap. A convertible note is debt with a conversion right (DPIIT-only, INR 25 lakh minimum, 5-10 year tenor). CCPS is the default Series A instrument, equity-treated under FEMA NDI, with full preference rights. iSAFE is fastest; CCPS is most flexible; convertible notes are narrowest.
15. Pre-money SAFE vs post-money SAFE: what is the dilution implication?
Post-money SAFE locks the founder’s dilution at issuance (the SAFE holder gets a fixed percentage of the post-money cap table). Pre-money SAFE shifts dilution onto the founder if more SAFEs are issued before the priced round, because the percentage is calculated against the pre-money cap table that excludes the new SAFEs. Most Indian iSAFE templates default to post-money structuring to align with US 2018-onwards practice.
16. Indian term sheet vs US Series A (NVCA) term sheet: what are the key differences?
Indian term sheets carry FEMA, CCPS, DPIIT, and Press Note 3 overlays; founder personal indemnity is more common (the India asymmetry); reverse-flip language is now routine; arbitration is often Singapore-seated for cross-border rounds. US Series A NVCA term sheets are more standardised, founder-friendlier on indemnity, lack the FEMA layer, and use Delaware law and Delaware Chancery jurisdiction by default. The two templates are not interchangeable.
References
Last verified: 2026-05-05
Case Law
- Cruz City 1 Mauritius Holdings v. Unitech Ltd., (2017) 239 DLT 649. Delhi High Court, judgment dated 11 April 2017 (Hon’ble Mr. Justice Vibhu Bakhru). Authority on enforcement of foreign-seated arbitral awards on put-option valuation despite FEMA pricing constraints.
- M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd., (2004) 9 SCC 204. AIR 2004 SC 909; Supreme Court of India, Ruma Pal and B.N. Srikrishna, JJ., judgment dated 1 August 2003. Authority that contracts between specific shareholders for transfer of shares are enforceable inter se as contracts under the proviso to Section 58(2) of the Companies Act, 2013.
- Oravel Stays Pvt. Ltd. v. Zostel Hospitality Pvt. Ltd., 2025 SCC OnLine Del 3377. Neutral citation 2025:DHC:3661; Delhi High Court, O.M.P. (COMM) 151/2021, Hon’ble Mr. Justice Sachin Datta, judgment dated 13 May 2025. The Supreme Court (Justices Sanjay Kumar and Satish Chandra Sharma) on 29 July 2025 declined to entertain Zostel’s special leave petition; Zostel withdrew the petition. Authority that an express non-binding clause in a term sheet cannot, by conduct alone, be elevated into a binding contract granting specific performance.
- V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160. AIR 1992 SC 453; Supreme Court of India, P.B. Sawant and B.P. Jeeven Reddy, JJ., judgment dated 28 November 1991. Foundational authority that share-transfer restrictions in a shareholders agreement are not enforceable against the company unless reflected in (or at least not contradicting) the Articles of Association.
Statutes
- Indian Contract Act, 1872, Section 10: what agreements are contracts (consensus ad idem, lawful consideration, competent parties).
- SEBI (Alternative Investment Funds) Regulations, 2012, including the revised Angel Fund framework, SEBI Circular SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/128 dated 10 September 2025.
- Companies Act, 2013, sections cited: Section 42 (private placement procedure), Section 55 (issue and redemption of preference shares), Section 58 (refusal of registration and transferability of shares), Section 62 (further issue of share capital), and Sections 230-232 (schemes of compromise or arrangement).
- Companies (Acceptance of Deposits) Rules, 2014, as amended on 29 June 2016 (introduced convertible note exemption for DPIIT-recognised startups, INR 25 lakh single tranche, originally 5-year tenor) and further amended on 7 September 2020 (tenor extended to 10 years).
- FEMA (Non-Debt Instruments) Rules, 2019; RBI / FEMA Notification No. FEMA. 395/2019-RB, Department of Economic Affairs, 17 October 2019.
- Press Note 3 of 2020, DPIIT, dated 17 April 2020; implemented via FEMA (Non-Debt Instruments) Amendment Rules 2020 dated 22 April 2020.
- Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024; MCA Notification G.S.R. 555(E) dated 9 September 2024 (effective 17 September 2024); Rule 25A sub-rule (5) inserted to enable inbound cross-border fast-track reverse mergers under section 233 of the Companies Act, 2013.
- DPIIT Gazette Notification G.S.R. 108(E), 4 February 2026: Deep Tech Startup recognition; recognition extended to 20 years; turnover ceiling raised to INR 300 crore (deep-tech) and INR 200 crore (regular startups).
Regulatory and primary sources
- SEBI Angel Fund framework circular, 10 September 2025.
- Mondaq legal update on the DPIIT 2026 Deep Tech Startup notification (G.S.R. 108(E), 4 February 2026).
- SCC Online commentary on the Delhi High Court ruling, OYO v. Zostel, 13 May 2025.
- Business Standard report on the Supreme Court refusal to entertain Zostel’s SLP, 29 July 2025.
- Cyril Amarchand Mangaldas analysis of the September 2024 Rule 25A amendment.
- FEMA (Non-Debt Instruments) Rules, 2019: RBI notification page.
Legal disclaimer
This article is published for informational and educational purposes. It does not constitute legal advice and should not be relied upon as a substitute for consultation with a qualified advocate or company secretary on the specific facts of any transaction. Term sheet drafting for Indian startups involves statutory, regulatory, tax, and structuring issues that depend on deal structure, counterparties, instrument choice, and timing. Readers are advised to consult qualified counsel before taking any action based on the information in this article. iPleaders, its authors, and LawSikho assume no liability for any loss or damage arising from reliance on the content here.
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