Term Sheet and SHA Clauses Indian Founders Negotiate: Liquidation Preference, Anti-dilution, Drag-along

A term sheet is short and mostly non-binding; the shareholders' agreement (SHA) and the share subscription agreement that follow are long and binding. Founders often negotiate hard on valuation and then accept the rest of the term sheet as “standard”. The clauses below decide who gets paid first, who controls key decisions and how you can be forced to sell — they deserve as much attention as the price.

Economics: what investors get on an exit

Liquidation preference

On a sale or winding up, preference shareholders get their money back before ordinary shareholders. Three variables matter:

• The multiple: 1x returns the amount invested; anything above 1x is aggressive in most early rounds.
• Participating or non-participating: a non-participating investor takes either the preference or their pro-rata share as if converted, whichever is higher. A participating investor takes the preference and then also shares in the rest.
• Seniority: whether later series are paid before earlier ones or all series share equally (pari passu).

Model it. Take three exit values — a disappointing one, a base case and a strong one — and work out what founders and employees receive under the proposed terms. The disappointing case is where preferences bite.

Anti-dilution

If you later raise at a lower price, anti-dilution adjusts the investor's conversion price. Broad-based weighted average adjusts modestly, taking into account the size of the down round. Full ratchet resets the earlier investor's price to the new lower price regardless of size — severe for founders. Ask for broad-based weighted average with carve-outs for the ESOP pool, shares issued in acquisitions and other agreed issues.

Instruments and conversion

Indian rounds commonly use compulsorily convertible preference shares (CCPS). If the investor is non-resident, foreign-exchange rules require the conversion price or formula to be determined upfront at the time of issue, and the price at conversion cannot be lower than the fair value at the time of issue. That limits how far anti-dilution can move the conversion price later — check the mechanics with counsel rather than assuming a US-style adjustment will work.

Control: who decides what

Board and reserved matters

Investors usually take a board seat and a list of “reserved matters” that need their consent. A protective list covers changes to share capital, the Articles, a sale or winding up, related-party transactions and a new line of business. An operational list adds hiring above a salary level, every budget variance or every contract above a small value. Push for the protective list and for thresholds high enough that the business can run without weekly consent emails.

Information rights

Monthly management accounts within a set number of days, the annual budget and audited accounts are standard. Make sure the timelines match what your finance team can actually produce — a missed deadline is a breach.

Transfers and exits

• Right of first refusal (ROFR) or first offer (ROFO): before anyone sells, the others can buy. Agree exempt transfers (family trusts, ESOP exercises).
• Tag-along: if a majority holder sells, minorities can sell on the same terms.
• Drag-along: holders above a threshold can force everyone to sell. Ask for a minimum price or return, a time after which it applies, and founder liability limited to title to their own shares and capacity — not business warranties.
• Exit obligation: some SHAs require the company and founders to provide an exit within a period, with a put option if they do not. Put options in Indian private companies raise foreign-exchange pricing and enforceability questions; agree what “best efforts” means rather than an unconditional obligation.

Founder obligations

Expect lock-in of founder shares, vesting (see our co-founder vesting teardown), non-compete while you are a founder, and representations and warranties about the business. Cap founder liability for warranties, limit it to fraud or to a fixed amount, and set a time limit for claims.

Make the Articles match

Rights in an SHA are enforced most reliably when they are reflected in the Articles of Association. Investors will ask for amended Articles as a condition of closing; read them line by line against the SHA, because mismatches are where disputes start.

A practical review routine

1. Build a cap table and an exit waterfall before you negotiate the economics.
2. Mark each clause standard, fallback or not acceptable for you — the Term sheet & SHA sheet in the checklist workbook has the list.
3. Ask for a redline from the investor's counsel and keep each version numbered.
4. Check that the Articles mirror the SHA before closing.

Worked example: why the preference terms matter (illustrative)

An investor puts ₹5 crore into a company for 20% on a fully diluted basis. The company is later sold for ₹15 crore. With a 1x non-participating preference, the investor chooses the higher of ₹5 crore (the preference) or 20% of ₹15 crore (₹3 crore) — so takes ₹5 crore, and ₹10 crore goes to everyone else. With a 1x participating preference, the investor takes ₹5 crore and then 20% of the remaining ₹10 crore, ₹2 crore — ₹7 crore in total, leaving ₹8 crore. With a 2x non-participating preference, the investor takes ₹10 crore and only ₹5 crore is left for founders, employees and angels. At a ₹100 crore exit, all three structures leave the founders in roughly the same place. The differences live in the modest exits — which is why you model them before signing.

Common mistakes

• Agreeing the valuation and treating the rest as boilerplate.
• An ESOP pool created post-money when the term sheet said pre-money — the dilution falls on founders.
• Reserved matters copied from a later-stage deal, with thresholds that make routine decisions need consent.
• Founder warranties without a cap or a time limit for claims.
• Articles amended in a hurry at closing and never compared with the SHA.