A founder walks into a seed pitch having rehearsed the product story fifty times. The investor nods, asks about the liquidation preference stack, and the founder smiles and says something vague. The investor makes a small note. The round takes three more months than it should have.
This is not about intelligence. It is about vocabulary. The funding world runs on a shared language, and founders who do not speak it fluently signal to investors, often unfairly, that they are not ready. Every term below is something you will encounter in a real conversation, on a real term sheet, or in a real cap table negotiation. Understanding them is table stakes.
This glossary is not arranged alphabetically. It is arranged the way you will actually encounter these terms, roughly in the order a startup moves through its funding journey.
Before the Round: The Foundations
Pre-Money Valuation The value of your company before new investment comes in. If an investor puts ₹5 crore into a company valued at ₹20 crore pre-money, the company is worth ₹25 crore after the round closes. Most negotiations start here. Founders often anchor too high too early.
Post-Money Valuation The value of the company after the investment is added. Post-money = pre-money valuation + investment amount. If an investor gives you ₹5 crore at a ₹20 crore pre-money valuation, the post-money valuation is ₹25 crore, and the investor owns 20%.
Dilution When a company issues new shares, every existing shareholder owns a smaller percentage of the total. Dilution is not inherently bad. Raising at a rising valuation dilutes your percentage but increases the value of what you hold. The problem is when dilution happens at bad terms or without founder awareness.
Cap Table (Capitalisation Table) A document showing who owns what percentage of the company and in what form. It lists every shareholder, every class of equity, every option pool, and every convertible instrument outstanding. A messy cap table is one of the most common reasons an Indian funding round stalls during due diligence. Clean cap tables close faster.
ESOP Pool (Employee Stock Option Plan) Equity reserved for future employees. Investors typically require an ESOP pool to be created before the round closes, which means the dilution from that pool hits the founders, not the investors. A standard ESOP pool is 10% to 15% of the post-money cap table. Always ask whether the pool is being created pre-money or post-money. It changes the maths significantly.
Early-Stage Instruments: How Money Enters Before a Price Is Set
SAFE Note (Simple Agreement for Future Equity) Introduced by Y Combinator, a SAFE is not debt. It is a contractual promise to give an investor equity at a future priced round. There is no interest rate, no maturity date, and no repayment obligation. The investor gets shares when the next round is priced. SAFEs are faster, cheaper, and simpler than convertible notes, which is why most angel and pre-seed rounds in India and globally now use them. However, SAFEs do not have legal clarity under Indian law the way convertible notes do. Indian law firms typically structure SAFE-equivalent instruments as Compulsorily Convertible Preference Shares (CCPS) to achieve regulatory compliance under FEMA and the Companies Act 2013.
Convertible Note A debt instrument that converts into equity at a later round. Unlike a SAFE, a convertible note carries an interest rate (typically 2% to 8% annually) and a maturity date, usually 18 to 36 months. If no priced round happens before maturity, the investor can demand repayment or renegotiate, which puts pressure on founders. The interest accrues and adds to the investor’s eventual equity at conversion, meaning the longer it takes to raise the next round, the more dilutive a convertible note becomes. Convertible notes carry more regulatory certainty in India, which is why Indian institutional investors often prefer them over SAFEs.
Valuation Cap The maximum company valuation at which a SAFE or convertible note converts into equity. It protects early investors from being penalised for backing you before the company was worth much. If an investor puts in money with a ₹10 crore valuation cap and the next round prices the company at ₹50 crore, that investor converts at the ₹10 crore cap, not ₹50 crore, giving them far more shares for their money. The cap rewards early risk.
Discount Rate A percentage reduction on the price per share that SAFE or convertible note holders receive when converting in the next priced round. A 20% discount means an investor converts at 80% of what new investors pay. Combined with a valuation cap, investors are entitled to whichever gives them the better outcome: the cap or the discount.
CCPS (Compulsorily Convertible Preference Shares) The primary instrument used for early-stage investment in India. CCPS carries preference rights (typically a liquidation preference) and is mandatorily converted into equity shares at a defined trigger event, such as a Series A round or an IPO. Most Indian angel rounds, seed rounds, and SAFE-equivalent structures use CCPS because it fits within the FEMA and Companies Act 2013 framework. Founders need to understand what conversion triggers are written into their CCPS documentation.
The Term Sheet: Where the Real Negotiation Happens
Term Sheet A non-binding document that outlines the proposed terms of an investment. It is the first formal offer. Most founders read the valuation number and feel relieved or disappointed. Experienced founders read every clause. The term sheet sets the template for all final legal documents. What you accept here shapes control, dilution, and exit economics for years.
Lead Investor The investor who anchors the round, sets the valuation, leads due diligence, and typically gets a board seat. Other investors follow the lead investor’s terms. Having a credible lead investor is one of the most important signals in an Indian funding round. It tells other investors that someone with skin in the game has already done the work.
Liquidation Preference Defines who gets paid first and how much, in the event of an exit, acquisition, or wind-down. A 1x non-participating liquidation preference means an investor gets their money back before founders and common shareholders, but only takes either the preference or their pro-rata share of the proceeds, not both. A participating preference (also called double dip) means the investor takes their preference first, then also participates in remaining proceeds alongside common shareholders. Participating preference without a cap is one of the most founder-unfriendly terms in a term sheet. Even at a respectable exit number, it can leave founders with significantly less than their ownership percentage implies.
As of Q2 2025, research from Cooley LLP shows 98% of venture rounds globally reverted to a 1x non-participating liquidation preference. In India, however, investors have more frequently pushed for participating preferences, especially in the current selective capital environment.
Anti-Dilution Protection A clause that protects investors if a future round is raised at a lower valuation (a down round). Two main types exist. Broad-based weighted average is the industry standard and the founder-friendly option. It adjusts the investor’s conversion price slightly downward, reflecting the down round proportionally. Full ratchet is far more aggressive. It resets the investor’s conversion price to exactly the price of the down round, regardless of how small the down round was. A full ratchet clause in a down round environment can be catastrophic for founders. If an investor insists on full ratchet protection, that is not a negotiation point. That is a signal to walk away.
Pro Rata Rights The right of an existing investor to participate in future funding rounds to maintain their ownership percentage. If a seed investor owns 15% of your company and a Series A closes, pro rata rights let that investor buy enough new shares to stay at 15%. This costs them money but protects them from dilution. For founders, pro rata rights are valuable negotiating currency. You can trade them for better terms elsewhere, such as a lower valuation cap or a more founder-friendly liquidation preference.
Drag-Along Rights A clause that allows majority shareholders (usually investors) to force minority shareholders (often founders) to approve a sale of the company if the majority has decided to proceed. It prevents one founder or minor shareholder from blocking an exit. Drag-along is standard, but the threshold and conditions matter enormously. Always check what percentage triggers the drag, and whether there is a minimum price floor below which the drag cannot be invoked.
Tag-Along Rights The inverse of drag-along. Tag-along gives minority shareholders the right to join a sale if majority shareholders are selling, on the same terms. It protects small shareholders from being left behind when founders or larger investors exit.
Right of First Refusal (ROFR) If a shareholder wants to sell their shares, ROFR requires them to offer those shares to existing shareholders first, at the same price and terms, before selling to an external party. Standard and expected. The issue is when ROFR is extended to investors on a company sale, which can complicate acquisition processes.
No-Shop Clause A provision in the term sheet that prevents founders from soliciting or accepting other investment offers for a defined period, typically 30 to 60 days. Its purpose is to give the investor time to complete due diligence without competition. Watch the duration and make sure it has a clear termination right if the investor delays unreasonably.
Equity Structure and Ownership
Preferred Stock vs. Common Stock Investors almost always receive preferred stock. Founders and employees hold common stock. Preferred stock comes with economic privileges, including liquidation preference and anti-dilution rights, and governance rights, including protective provisions and board representation. Common stock gets paid last in a liquidation. The gap between preferred and common becomes very significant in down rounds or modest exits.
Fully Diluted Shares The total number of shares outstanding if every option, warrant, convertible note, and SAFE were converted into equity today. Ownership percentages should always be calculated on a fully diluted basis. A founder who says they own 60% but has not accounted for the ESOP pool and outstanding convertibles often actually owns far less.
Option Pool A block of shares set aside for future employees, advisors, and consultants. Often referred to as ESOP pool in India. The critical question is when it is created. If created pre-investment, it dilutes only the founders. If created post-investment, it dilutes everyone including the investor. Investors almost always require a pre-money option pool, which effectively lowers the founder’s ownership before the new shares are even issued.
Vesting Schedule The timeline over which shares are earned rather than received immediately. A standard four-year vesting schedule with a one-year cliff means a founder earns nothing for the first year, receives 25% at the one-year mark, and earns the remaining 75% monthly over the next three years. Without vesting, a co-founder who leaves in month six keeps all their equity permanently. Vesting protects both the company and the remaining team.
Cliff The minimum time that must pass before any vesting occurs. A one-year cliff is standard. If a founder or employee leaves before the cliff, they receive nothing. After the cliff is passed, shares vest on a schedule, typically monthly.
Funding Stages
Pre-Seed The earliest institutional capital, often from angels, accelerators, or small family offices. In India, pre-seed rounds typically range from ₹50 lakh to ₹2 crore. The round is used to build an MVP, validate early assumptions, and demonstrate that the team can execute.
Seed Round The first significant institutional round, typically from angel networks like Indian Angel Network or LetsVenture, or early-stage funds like Blume Ventures or Stellaris Venture Partners. Seed rounds in India usually range from ₹1 crore to ₹10 crore and are used to achieve early product-market fit and initial traction.
Series A, B, C Successive priced equity rounds, each typically at a higher valuation than the last. Series A usually signals product-market fit and a clear growth model. Series B funds scaling. Series C and beyond are for market dominance or pre-IPO expansion. Each round introduces new preferred stockholders and additional terms that layer on top of previous rounds.
Bridge Round A smaller round raised between two larger rounds, usually when a startup has not yet hit the milestones needed to raise a full round at the desired valuation. Bridge rounds are often structured as convertible notes. They are not inherently negative but are frequently read by investors as a signal that the startup missed its targets.
Down Round A funding round closed at a valuation lower than the previous round. In India, valuations at the seed and early-stage level dropped 30% to 40% on average during 2023 to 2025 as part of a broader funding correction. A down round triggers anti-dilution provisions, complicates employee option plans, and can be damaging to morale and momentum if not communicated carefully.
Metrics Every Investor Will Ask About
Burn Rate The amount of cash a company spends each month, net of revenue. Gross burn is total monthly spend. Net burn is total spend minus revenue. Investors care about net burn. It tells them how long the company can survive without new capital.
Runway How many months a company can operate at its current burn rate before running out of cash. A startup with ₹2 crore in the bank and a ₹20 lakh monthly net burn has ten months of runway. Most investors want to see at least 18 to 24 months of runway post-funding.
MRR / ARR (Monthly Recurring Revenue / Annual Recurring Revenue) MRR is the predictable revenue generated each month from subscriptions or recurring contracts. ARR is MRR multiplied by 12. Both are critical metrics for SaaS and subscription businesses. A very rough and early-stage rule of thumb is that SaaS companies can be valued at 5 to 10 times ARR, though this varies widely based on growth rate, churn, and market.
Churn Rate The percentage of customers or revenue that is lost in a given period. High churn is one of the most effective ways to destroy a funding narrative. A startup growing at 20% MoM but churning 15% of users each month is not actually growing the way the headline number suggests.
CAC and LTV (Customer Acquisition Cost and Lifetime Value) CAC is the total cost to acquire one customer, including all sales and marketing spend. LTV is the total revenue a customer generates over their relationship with the company. A healthy LTV to CAC ratio is typically 3:1 or higher. Investors in India as of 2024 and 2025 scrutinise these metrics far more than during the 2021 bull run.
Exit and Governance
IPO (Initial Public Offering) When a private company offers its shares to the public for the first time through a stock exchange. India saw significant startup IPO activity in 2024, with Swiggy’s $1.35 billion listing being the largest global tech IPO of that year. IPO readiness is increasingly something institutional investors want to see on the founder’s horizon.
Acqui-hire An acquisition driven primarily by the talent of the founding team or key employees rather than the product or business itself. Common when a startup is struggling but has built a strong technical team that a larger company wants to absorb.
Carried Interest (Carry) The share of investment profits that a VC fund manager receives, typically 20%, after returning the principal to limited partners. Understanding carry helps founders understand what motivates their VCs. A VC who needs a 10x return to generate meaningful carry will behave differently in exit discussions than one who needs a 3x.
Board Seat vs. Observer Seat A board seat gives an investor formal voting rights at the board level, including on major company decisions. An observer seat gives an investor the right to attend and participate in board meetings but not vote. Founders should be careful about how early they give away board seats. Losing board control at seed stage is a structural problem that is very difficult to reverse.
The Take Nobody Will Give You in a Pitch Workshop
Most first-time founders read a glossary like this and think the goal is to use these terms fluently enough to impress investors. That is backwards.
The goal is to understand these terms well enough that you never sign something you regret. Liquidation preferences, anti-dilution clauses, and participating preferences are not abstract legal language. They are the exact mechanisms that determine how much money you actually take home the day your company exits, regardless of what your ownership percentage says on paper.
Founders who treat these terms as intimidating jargon they will sort out with a lawyer later are the ones who discover, after a ₹200 crore acquisition, that they made less than their Series A investor because of a 2x participating preference they signed without fully understanding it. Understanding the language is not about closing the deal faster. It is about knowing what you are actually agreeing to before you sign.
Read every term sheet clause. Model your cap table under different exit scenarios. Ask your lawyer to explain what happens at a ₹50 crore exit, a ₹200 crore exit, and a ₹10 crore fire sale. The answers will tell you everything you need to know about whether the terms in front of you are fair.
Frequently Asked Questions
What is the difference between a SAFE and a convertible note? A SAFE is an equity agreement with no debt component, no interest rate, and no maturity date. A convertible note is a debt instrument that accrues interest and has a repayment deadline. In India, SAFE-equivalent instruments are typically structured as CCPS due to regulatory requirements under FEMA and the Companies Act. Both instruments defer valuation to the next priced round, but convertible notes carry repayment risk that SAFEs do not.
Why do investors ask for participating liquidation preference? Participating preference gives investors a return on their capital first, then an additional pro-rata share of remaining proceeds. It protects investors in smaller exits. Founders should push for non-participating 1x preference as the market standard, which returns invested capital to the investor but does not allow double-dipping on the remaining exit proceeds.
What does it mean when investors ask to set the ESOP pool pre-money? It means the option pool is created before the new investment, which dilutes only the existing shareholders, primarily founders, not the incoming investor. A 15% ESOP pool created pre-money reduces the founder’s effective ownership before the investment even lands. It is standard practice but something every founder should model explicitly before agreeing to a pool size.
What is a down round and how does it affect founders? A down round is a funding round at a lower valuation than the previous one. It triggers anti-dilution clauses, which adjust the conversion price for existing preferred shareholders. If full-ratchet anti-dilution is in the existing term sheet, a down round can severely dilute founders. Broad-based weighted average anti-dilution, the market standard, causes far less damage.
What is the most important term in a term sheet for a founder to scrutinise? Liquidation preference is the single term that most directly determines founder economics at exit. How it is structured, participating or non-participating, at what multiple, and how it stacks across multiple investment rounds determines how much founders and common shareholders actually receive, regardless of what the company sells for.
Should Indian founders use SAFEs or convertible notes? In practice, Indian founders typically use CCPS, which functions as a SAFE equivalent under Indian law. For founders raising from India-based investors, convertible notes provide clearer regulatory certainty. For founders raising from international angels, a SAFE with careful FEMA-compliant structuring may be possible but requires specialist legal counsel.
What are pro rata rights and should founders give them to all investors? Pro rata rights let investors maintain their ownership percentage in future rounds by buying new shares. Founders should grant them selectively, only to investors who bring strategic value beyond capital. Pro rata rights given to too many investors can complicate future rounds by limiting room for new lead investors.
Sources
- EquityList India — CCPS, SAFE vs Convertible Note frameworks and Indian regulatory compliance — https://www.equitylist.co/blog-post/safes-vs-convertible-notes
- USA India CFO — SAFE vs Convertible Note India and US comparison including FEMA and Companies Act considerations — https://usaindiacfo.com/convertible-notes-vs-safe-agreements-india-us-comparison-for-startups-and-investors/
- CRV — Pro Rata Rights: founder’s guide to term sheets — https://www.crv.com/content/pro-rata-rights
- Cooley LLP (via GoingVC) — Q2 2025 venture round data: 98% of rounds using 1x non-participating liquidation preference — https://www.goingvc.com/post/term-sheet-provisions-vcs-must-pay-attention-to
- Startup Movers — Every fundraising term founders should know in 2025, CCPS and India-specific terms — https://www.startup-movers.com/blog/every-fundraising-term-founders-should-know-2025-edition
- Medium / Akhil Mishra — Term Sheets Decoded: founder-friendly clauses that preserve optionality, India 2025 — https://medium.com/@itsAkhilMishra/term-sheets-decoded-founder-clauses-india-2025-013d2ae6c5fe
- Carta — Convertible securities, term sheets, and cap table fundamentals — https://carta.com/learn/startups/fundraising/convertible-securities/
- BW Disrupt — India startup funding H1 2025 data: seed funding down 44% YoY — https://www.bwdisrupt.com/article/india-startup-funding-2025-a-year-of-reset-before-recovery-585366
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