Term sheets are negotiable: Clauses often have 10–20% wiggle room; founders should carefully negotiate valuation, disbursement schedules, and liquidation preferences.
Key clauses to watch: Avoid staggered funding, insist on liquidation preference capped at 1× invested capital, push for broad-based weighted average anti-dilution, and ensure vesting schedules credit prior years.
Vague risks: “Termination for cause” should be clearly defined (linked to a charge sheet, not vague discretion) to protect vested shares.
Investor diligence: Founders should research investor behavior by speaking with other portfolio companies; the paper doesn’t tell the full story.
At the Nasscom Generative AI Foundry Bootcamp one of the sessions was not about technology at all. It was about the fine print that can make or break a start-up’s future. Kaushik Rajan, partner at Stoicus Legal, a law firm specialising in start-up advisory, walked participants through a session titled Term Sheet Teardown. He dissected real-world clauses, flagged red lines and explained where founders have room to push back.
What followed was a mix of legal insight, interactive roleplay and cautionary tales. It was an insider’s guide to recognising when a pipe is not a pipe, as Rajan analogised using the surrealist painting by René Magritte. “When you get a term sheet, investors will tell you this is standard. But remember, it is not a pipe you can smoke. There is always at least 10–20% wiggle room. The trick is knowing what to negotiate, what to accept and when to walk away,” he said.
Rajan’s first reality check was that securing a lead investor is often the toughest part of fundraising. “The lead almost always squeezes you on valuation,” he said. “That is where most founders underestimate their negotiating position.”
In a case study discussion, participants learned how convertible notes can defer valuation but also come with pitfalls. “Most venture capitalists do not like convertibles. They prefer priced rounds because it gives them preferential rights over ordinary equity,” Rajan explained.
Key Clauses to Negotiate
He also cautioned against staggered disbursements, say ₹2 crore now and ₹2 crore later. “Always push to get the full amount upfront,” he warned. “If the market turns or your performance dips investors may withhold the remainder. Then you are stuck raising perpetually.”
Perhaps the most eye-opening portion of the session was Rajan’s breakdown of liquidation preferences, the clause that determines who gets paid first when a company exits. “Industry standard is one times the invested capital,” he said. “But I have seen desperate founders agree to 1.1 times or even 1.5 times. That extra 0.1 adds up. Every new investor will demand the same and by Series C (a late-stage round of venture capital funding) you will find yourself at the bottom of the payout ladder.”
He illustrated how seemingly lucrative exits often leave founders with little to show. “That is why you hear of start-ups being acquired for $100mn but the founders walking away with just $6mn. It is the cumulative effect of liquidation preferences stacked round after round.”
From anti-dilution clauses to vesting schedules, Rajan walked participants through other minefields. He advised that if founders must agree to anti-dilution, it should be broad-based weighted average. He cautioned against full ratchet terms, describing them as far too punitive.
On vesting he flagged how investors often reset the clock during fresh rounds. “If you have already vested shares, negotiate credit. Otherwise, you are starting from zero again,” he said.
Equally contentious are “termination for cause” clauses where founders can lose vested shares if deemed unethical. “The scary part is most agreements do not define what ‘cause’ actually means. At minimum push for determination via a charge sheet rather than just an FIR. Otherwise, you are at the mercy of perception,” Rajan noted.
Beyond Clauses and Contracts
What made the session resonate was not just the legal detail but the human context. Rajan urged founders to do their own diligence not just on the document but on the investors themselves. “Talk to other founders they have backed. Do they turn up unannounced at your office? Do they micromanage board meetings? Do not assume the paper tells the whole story,” he said.
He also pointed to how investor behavior shifts post-funding. “If your experience is good, remember, it may be because they see you as their one in 15 who will deliver 50 times return. For others it is not always as rosy.”
By the end of the session the cheat sheet Rajan promised was less about legal jargon and more about mindset. He stressed that founders should never rush to sign a term sheet no matter how urgent the deadline appears. “False urgency is a tactic, always push back by citing your advisors or existing investors,” he said.
Equally important was the insistence on getting the full investment upfront rather than agreeing to staggered disbursements that weaken a start-up’s negotiating position.
On liquidation preferences Rajan was firm. “It must stay at one time the invested capital. Anything above that sets a dangerous precedent that compounds across rounds.”
He also urged clarity in vesting clauses, especially around “termination for cause” which should be tied to charge sheet-based triggers not vague investor discretion.
Above all he reminded founders to do their own diligence on investors by speaking directly with other entrepreneurs they have backed rather than relying solely on paper or legal advice.
