Structuring the Term Sheet: What to Negotiate and What to Leave Alone
The clauses that matter, the ones that are standard, and the three provisions that have ended more SME founder careers than any other
Who this is for
Founders who have received a term sheet from a PE, VC, or strategic investor and are trying to understand what is negotiable, what is standard, and what is dangerous. Also relevant for founders preparing for a fundraise who want to understand the terms before they are in the room.
What it costs you to ignore it
The diagnosis behind it
This playbook is triggered by a Red or Critical finding on:
Vital 4 — Fundraising & Investor ReadinessThe Protocol
Before responding to the term sheet, engage a transaction lawyer who has represented founders — not just companies — in PE/VC transactions. This is not optional. Budget ₹1.5–₹4 lakh for legal advice on a term sheet.
Understand the liquidation preference: is it 1x non-participating (standard and acceptable), 1x participating (gives the investor double-dip — push back), or 2x+ (walk away unless the valuation is exceptional)?
Understand the anti-dilution clause: broad-based weighted average (standard), narrow-based weighted average (acceptable with negotiation), or full ratchet (unacceptable — it transfers value from founders to investors in any down round).
Review the drag-along clause: who can trigger it, at what threshold, and does it require board approval or just investor approval? A drag-along that can be triggered by a minority investor without board consent is a control risk.
Negotiate the information rights and board composition separately from the economics. Board seat composition and reserved matters (decisions requiring investor consent) are where day-to-day control is actually determined.
Model three exit scenarios — IPO at 4x, strategic sale at 2x, and distress sale at 0.8x — and calculate what each party receives under the proposed terms. If the distress scenario leaves founders with nothing while investors are made whole, renegotiate the liquidation preference.
What you can do yourself vs what needs help
This playbook cannot be executed without a transactions lawyer. The advisor's role here is to help you understand the commercial implications of each clause before the lawyer translates them into legal language — so you are not paying legal fees to understand basic concepts.