The Reality of VC Term Sheets in India: The Hidden Clauses Founders Regret

1. The “Clean Exit” Lie
All founders wish for a graceful exit (IPO, strategic sale, or secondary sale at a lofty valuation) and typically believe that growth and success should allow for the exit of investors and their own liquidity (Like a company moat, compound spending style, however growth valuations are not necessarily guaranteed). The reality for most Indian term sheets is anything but.
Almost none include the rather simple structures that would allow for a graceful exit. Instead, they incorporate forced exit mechanisms (drag along rights), put options, and buy back structures. A drag along right allows the investor to compel founders to sell if a stake sale exceeds a threshold level for a sale. This means the investor can compel the founders to sell regardless of timing, buyer, or valuation. A put option allows investors to “sell” their stake back to the founders or company after a defined period (read: indefinite waiting), (often) at some pre-negotiated return which is typically in the 20 to 25 percent annualized on the invested capital.
These funds become ticking clocks for founders. Once growth slows, or the market softens, the investors are entitled to create the obligations via the terms of the agreement to either be bought out or agree to their desire to sell their stake, regardless of the founder's intentions, plans or current abilities for sale. What may have been tinted and painted to look like a temporary capital partnership can become a time bound obligation and ultimately lose any semblance of the founder's agency over the outcome of the time frame of their venture exit.

2. The Board Seat Clause That Silently Removes Founders
In the early stages, founding teams tend to view board representation as symbolic — a signal to show that they are engaged with an investor or having a regularly scheduled process. A director, and one observer, looks perfectly harmless. But as businesses grow, these roles can move into real forms of control.
With reserved matters and affirmative voting rights, that reasonable investor director can veto essential operational and financial decisions of the company: hiring key management, raising follow-on capital, executing major contracts, changing business strategy, and even shutting down segments of the business. In periods of time, operational control moves away from the intuition of the founding team to the permission of the investor.
In many mid-stage Indian startups, founders find themselves in board meetings defending budgets, seeking investor permission to pay for marketing, and being overridden through consensus with votes from investors and their aligned directors. The founder continues to be the face of the company while losing real control. Gradually, the company's DNA changes from entrepreneurial to investor-led — and the founder becomes an employee with stock instead of an employer with a vision.

3. Anti-Dilution Clauses That Punish Market Downturns, Not Founder Mistakes
When the market reaches a temporary downtick or the funding winter comes, valuations across the ecosystem suffer. However, under anti-dilution provisions the pain is never shared equally. Anti-dilution provisions protect an investor's value from being diminished by rebalancing their ownership ratio whenever a future financing round occurs at a lower price.
Terms like "broad-based weighted average" sound technical, but the mechanics of it are actually quite simple: the founder's ownership gets diluted, but never the investor's ownership, and the rebalancing occurs regardless of whether the valuation dropped due to external conditions (investor pessimism) rather than the startup's operating performance.
For example, imagine a startup that is required to raise its next round at 30% below the previous valuation due to investor pessimism in the industry. The early investor is now "protected" because instead of losing their ownership value, rising ownership value was simply accompanied by a free share subscription. The value of their recent investment effectively did not go down in value. The founder, however, loses equity in this situation, and in addition, the ESOP pool has to expand (typically out of the founders share of equity), and the ownership allocation on the cap table starts to get flipped in an irreversible way.
The reality, of course, is that it is particularly frustrating for founders to see their ownership increase due to no operational or performance reasons, but due to global volatility that they have no control over.

4. Founder Vesting: The Clause That Turns Ownership Into a Trap
Vesting clauses are put in place to ensure that founders remain committed, but no one reads the fine print deep enough. Indian term sheets have typically required 3 to 4 years of vesting with a one-year cliff, which seems fair on the surface.
But in strained relationships, these terms become lethal. If the investor-dominated board decides that a founder is "not performing" or "misaligned," then that founder can be forced out, and all their unvested shares would automatically return to the company. Even if a founder created the product, attracted the first customers, or led early growth, an exit under vested conditions can practically zero out their equity.
What’s worse, Indian legal structures rarely define “cause” or “misconduct” precisely enough, leaving vast interpretive gray zones for removal. A new CEO often chosen by the investor who steps in, reaping the benefits of an already-built business.
Smart legal negotiation can soften this blow-founders can insist on partial vesting in special situations, accelerated vesting upon investor-driven sale, or buyback rights if termination isn't voluntary. Yet most skip these details entirely, not realizing how crucial they are until it's too late.

5. The “Compliance” Clause That Blocks Growth When You Need It Most
Agreements between investors and promoters do have compliance clauses for transparency, but Indian investors use them as levers of control. Requirements for financial MIS reports, legal certificates, and quarterly audits sound routine. Yet, even a minor delay or missing report can become technical “breach of agreement.”
That breach then empowers investors to delay or withhold further tranches of funding-a lethal blow when the company's burn rate depends on those funds. Founders focused on building teams and chasing customers suddenly find themselves spending weeks juggling auditors, preparing MIS formats, and navigating legal paperwork.
Several Indian startups, especially those in early to mid-stage growth phases, saw huge slowdowns as investors cited "non-compliance" as reasons to delay disbursement. In many such cases, the company never recovered, not due to business failure, but administrative throttling.
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6. The Hidden Control Behind ESOP Pool Expansion
On the surface, increasing the ESOP pool sounds like a win-win. It helps in retaining talent, aligning employees with long-term goals, and scaling operations. Every term sheet has this. The trap lies in who bears the dilution.
That's usual because investors require that new ESOP allocations come only from the founder's equity, never from theirs. Thus, at every pool expansion, the founder's share shrinks while the investor's does not. This effect compounds over multiple rounds.
For example, a company starting with a 10% ESOP pool can extend to 20% by the third round. If such expansions keep coming from the founder's portion, the dilution can exceed cumulatively 30–40%. And it does so silently-sans confrontation: numbers on a spreadsheet keep transferring ownership from founders to financial investors.
In various negotiations, founders have successfully argued for proportional ESOP dilution shared by all shareholders. Such victories are, unfortunately, rare because most sign before understanding the tradeoff written into just one line of legal text.

7. Liquidation Preference: When Even a Great Exit Feels Like a Loss
Liquidation preference is perhaps one of the most misunderstood clauses in venture funding. It defines who gets paid and how much upon selling or liquidating the company. If an investor has a 2x liquidation preference, they get back twice their investment before founders see a rupee. Theoretically, this rewards risk capital. In reality, it often leaves founders empty-handed even after a seemingly great acquisition.
Take a common scenario: a startup sells for 100 crore. The investor who invested 25 crore with a 2x preference takes the first 50 crore. Add in exit costs, debts, and ESOP payouts, and the founder's portion shrinks dramatically. Many founders walk away with less than their starting salaries after years of work and that’s in a successful exit.
The psychological toll is worse: selling the dream company feels like losing it. Liquidation preference clauses rarely feel predatory until you're at the closing table, realizing that "preference" means priority over the very value you created.

Final Insight: The Illusion of Partnership
A term sheet reads like the beginning of a collaboration, but in most Indian deals, it is the moment when the control changes hands quietly. The founders focus on money and valuation. The investors focus on recovery, rights, and influence. The truth is that a term sheet is not a business contract. It is a control document carefully designed to balance investor risk by redistributing founder power. Over the last decade, dozens of Indian startup founders have realized — often too late — that fairness isn’t written in optimism; it’s negotiated in clauses. The only real defense is foresight: working with a law firm that understands the psychology of both sides, balances ambition with caution, and translates excitement into enforceable protection. Because once the deal is signed, every regret is already inked in legal language.