The call ends. Your co-founder texts you in all caps. You tell your family something is happening, without specifying what, because you have been here before and it did not close. This time feels different. The partner was warm. The fit was obvious. They said yes.
Then nothing happens for three days.
Then their associate sends you a thirty-two page term sheet with a two-day deadline and a no-shop clause that locks you out of every other conversation you have been running in parallel.
What happens between a verbal yes and money in your bank account is one of the least-discussed parts of the fundraising process, and one of the most consequential. Founders who do not understand what comes next lose valuation, lose control, and occasionally lose the deal entirely. This is what the process actually looks like.
The Term Sheet Is Not a Yes
When a VC says yes in a partner meeting, what they are actually saying is: we want to invest, subject to finalising terms, completing due diligence, and getting our investment committee to ratify the decision.
The term sheet comes next. It is usually a short document, rarely longer than ten to twelve pages, but do not let the length deceive you. Every line in it has been negotiated in hundreds of deals before yours and has financial consequences that will outlast the relationship you are building with the investor.
A term sheet is almost entirely non-binding. The two clauses that are binding are the no-shop clause, which prevents you from raising capital from anyone else for a defined window (usually 30 to 60 days), and the confidentiality clause. Everything else is a framework for the final agreements.
Read the no-shop carefully. Committing to exclusivity before you have confirmed the lead investor can close, has the capital committed, and will not renegotiate after signing is a risk most first-time founders do not account for. A signed term sheet does not mean the round closes. In a volatile market, term sheets have disappeared after signing when portfolio performance slipped, market conditions shifted, or a diligence finding spooked the partnership.
What the Term Sheet Actually Contains
The headline number, the valuation and round size, gets the most attention. It deserves about 40% of yours. The other 60% sits in clauses that will determine how much of the outcome you actually keep.
The five clauses that matter most for Indian founders are these.
Liquidation preference determines who gets paid first and how much in any exit, whether that is an acquisition, a buyback, or a winding down. The market standard in India at Series A is a 1x non-participating preference. That means the investor gets back their invested amount before common shareholders receive anything, but does not participate further once that threshold is returned. A 2x preference doubles that floor. Participating preference means the investor recovers their principal and then participates in the remaining proceeds alongside founders. The difference between 1x non-participating and 2x participating on a ₹200 crore exit can be ₹40 to ₹50 crore coming directly out of the founder’s pocket.
Anti-dilution protection kicks in if a future round is raised at a lower valuation than the current one. Full ratchet anti-dilution is the most aggressive form: the investor’s conversion price resets to the lowest price in any future down round, potentially wiping out a large portion of founder equity. Weighted average anti-dilution, which calculates a blended conversion price based on the size and price of the down round, is the market standard and far less punishing. Push back on full ratchet provisions at every stage.
Board composition is where control is allocated, not just governance. Most Series A term sheets in India give the lead investor one board seat. A five-person board with two founders, one investor, and two independents is relatively balanced. A three-person board with two investors and one founder is not, regardless of what the shareholder agreement says about protective provisions. Count seats carefully before you count votes.
Founder vesting, also called reverse vesting, is a standard ask and a reasonable one. A four-year vesting schedule with a one-year cliff means that if a founder leaves before year one, they take no vested shares with them. After the cliff, shares vest monthly or quarterly over the remaining three years. The founder’s unvested shares return to the company for reissue. What founders should watch is whether the investor is asking for a fresh vesting schedule on shares already earned. That is not standard and should be resisted.
ESOP pool sizing has a less obvious but significant dilution impact. Investors in India often ask for the option pool to be set pre-money, meaning the pool is carved out before the investor’s stake is calculated. That dilution falls entirely on the founders, not on the incoming investor. In practice, a ₹5 crore pool created pre-money on a ₹40 crore pre-money valuation reduces the effective pre-money valuation for founders by ₹5 crore before the investor calculates their ownership.
Due Diligence: What the Investor Is Actually Doing
Once the term sheet is signed, formal due diligence begins in parallel with legal documentation. Most founders experience due diligence as a data request exercise. That is accurate, but incomplete.
The investor’s legal and finance teams are running six concurrent workstreams: financial, legal, tax, regulatory, IP, and human resources. For Indian startups raising from foreign-linked funds, FEMA compliance is a seventh track that can delay or block closing entirely.
Financial diligence verifies that the numbers in your pitch deck reflect reality. Audited financial statements, MIS reports, ARR schedules broken down by customer, cohort retention data, CAC and LTV by channel, and a reconciliation between your forecast model and your historical actuals. The question they are answering is not whether your business is good. It is whether the management team understands their own numbers. Founders who cannot explain why a metric moved in a particular quarter lose credibility faster than founders who have a bad quarter but can explain it precisely.
Legal diligence examines whether the company is clean. Clean means every share issued has been properly authorised and recorded, every prior investor has signed the documents they were supposed to sign, IP is assigned to the company (not sitting with founders personally or with contractors who never signed assignment agreements), employment contracts are executed, and there are no outstanding disputes or litigation. A single unsigned IP assignment from a contractor who built your core product can delay a round by weeks and cost significantly in legal fees to remediate.
FEMA compliance is the India-specific workstream that catches founders off guard. Any prior foreign investment, whether from an NRI angel, a Singapore-based fund, or a US accelerator, required filings with the RBI via Form FC-GPR within 30 days of share allotment, and annual FLA returns filed by the 15th of July each year. Investors check these without exception. Missing an FC-GPR filing for a prior round requires a compounding application to the RBI and adds a closing condition to the Share Subscription Agreement, typically delaying close by four to six weeks. One client in a widely reported Series A missed three years of FLA returns. The compounding application added ₹12 lakh in penalties and nearly killed a ₹45 crore round. The round closed, but on revised terms and with a materially weakened negotiating position.
The good news: angel tax, which had previously created risk for startups issuing shares at a premium above fair value, was abolished for FY 2025-26 onwards. This eliminated a significant source of diligence complexity that affected pre-Series A rounds, particularly those with DPIIT-recognised startups receiving NRI or foreign capital.
Definitive Documents and What They Lock In
Once diligence is substantially complete, the legal teams on both sides begin drafting the definitive documents. For a priced equity round in India, these typically include five agreements: the Share Subscription Agreement (SSA), the Shareholders’ Agreement (SHA), the Share Purchase Agreement (if any secondary is involved), the Updated Articles of Association, and board resolutions approving the issuance.
The SHA is the document that governs the relationship between founders and investors for the entire life of the investment. Protective provisions, which are the investor’s veto rights over material decisions, live here. Standard protective provisions include issuing new equity, raising debt above a threshold, selling the company, changing the board structure, and amending the articles. Extended protective provisions, covering things like hiring above a salary threshold, entering new business lines, or changing the CEO, are negotiable and should be scrutinised. Every item on the protective provisions list is a decision where you will need your investor’s permission to proceed. Model what that looks like in practice before you sign.
The entire process, from signed term sheet to money in the account, takes 30 to 90 days for a typical Indian Series A. Pre-seed and seed rounds using convertible instruments can close in two to four weeks. Rounds with foreign investors, complex cap tables, FEMA remediation requirements, or multiple co-investors routinely take 90 days or longer.
What Changes the Day the Money Arrives
The round closes. The wire hits. The cap table updates. And the dynamic of the relationship changes, because now the investor is a co-owner of your company, not a prospect you are trying to impress.
Board meetings go from optional updates to governed sessions. Information rights kick in, meaning you owe your investor monthly MIS, quarterly financials, and annual audited statements on a defined schedule. Many founders experience this as a sudden jump in administrative overhead that nobody warned them about. Build a finance and compliance function before close, not after. Companies that prepare these systems in advance of closing are better positioned for every conversation that follows.
The relationship with the investor is not adversarial by default. The best outcomes, from Razorpay’s expansion across India’s payment stack to Meesho’s category-defining growth, happened because the investor’s network and operational judgment added genuine value beyond the capital. That value requires founders to engage proactively, share bad news early, and treat the board as a resource rather than a reporting obligation.
The term sheet, the diligence, the documentation, all of it is the foundation. What gets built on that foundation depends on whether the relationship was structured right at the beginning. One careless clause, one missed FEMA filing, one protective provision that seemed harmless in negotiations and becomes an obstacle two years later, these are the things that turn a good investment into a difficult one. Read everything. Question what you do not understand. And hire a startup-specialist lawyer before you start, not after you are already in diligence.
The Take Nobody Will Say Out Loud
Every founder is told to celebrate when the term sheet arrives. Almost none are told that the sixty days between term sheet and close are when the real negotiation happens, when the power balance is most in the investor’s favour, and when the decisions that will govern your next five years are made in rushed calls between lawyers who are billing by the hour.
The VC said yes in the room. What they meant is: we are interested, and we are now going to verify every assumption we made about you while extracting the most favourable terms the market will allow. That is not adversarial. It is their job. Your job, in that same window, is to understand exactly what you are agreeing to, push back where the terms are non-standard, and close on terms you can live with for the life of the company.
The founders who do this well have one thing in common. They read the term sheet the way the investor reads it, as a financial document first, and a relationship document second.
Frequently Asked Questions
Is a signed term sheet legally binding in India? Mostly no. The term sheet is a non-binding letter of intent that outlines the key terms of a proposed investment. Two exceptions are the no-shop (exclusivity) clause and the confidentiality clause, which are generally binding and legally enforceable. Indian courts have increasingly recognised term sheet breaches as actionable, so founders should not treat the document as informal even where it is non-binding.
How long does due diligence take after a term sheet is signed in India? For a typical Series A involving a foreign or foreign-linked fund, due diligence and documentation together take 45 to 90 days. Rounds with clean cap tables, audited financials, and all FEMA filings in order close faster. Rounds with missing filings, IP issues, or complex multi-investor structures routinely take longer. Founders should assume 60 days as a working baseline and plan cash runway accordingly.
What is a no-shop clause and should I agree to it? A no-shop clause prevents the founder from soliciting investment from other parties for a defined window after signing the term sheet, usually 30 to 60 days. It is standard and reasonable for serious investors to ask for exclusivity. Founders should negotiate the duration down to 30 days where possible, ensure the clause has a clear termination right if the investor fails to close on agreed timelines, and only sign exclusivity once satisfied the investor is genuinely committed and has capital available.
What does 1x non-participating liquidation preference mean? It means the investor recovers their investment amount first in any exit event before common shareholders receive anything. Once that amount is returned, the investor does not participate further in the remaining proceeds. This is the founder-friendly standard. A participating preference means the investor takes their principal back and then shares in the remaining proceeds alongside common shareholders, which can significantly reduce founder returns in mid-sized exits.
What FEMA filings does an Indian startup need before closing a VC round? For any prior foreign investment (from NRI angels, overseas accelerators, or foreign funds), the startup must have filed Form FC-GPR with the RBI within 30 days of each share allotment, and filed the annual Foreign Liabilities and Assets (FLA) return by July 15 for each year foreign investment was outstanding. Missing filings require a compounding application and can delay closing. DPIIT recognition simplifies some aspects of FEMA compliance and should be obtained early.
Can founders negotiate a term sheet or is it take it or leave it? Everything in a term sheet is negotiable. The degree of leverage depends on how competitive the round is, how much the investor wants the deal, and how clearly the founder understands what is standard versus aggressive. Valuation, liquidation preference, board composition, ESOP pool sizing, and protective provisions are all regularly negotiated. Founders should engage a startup-specialist lawyer before negotiations begin, identify their non-negotiables in advance, and push back on anything that deviates materially from market standard.
What happens if a VC pulls out after signing a term sheet? Because the term sheet is largely non-binding, the investor can technically withdraw without legal consequence beyond any reputational damage in the startup community. In practice, investors who have completed a formal investment committee process and signed a term sheet rarely withdraw without a material diligence finding. If the investor attempts to renegotiate economic terms after signing without a legitimate diligence basis, that is a red flag about how they will behave as a board member. Founders should take it seriously and, where possible, maintain parallel conversations until the round is formally closed and funds are received.
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