What is the difference between Participating and Non-Participating Liquidation Preference?

In a 1x Non-Participating preference (market standard), the investor gets either their original investment back OR their pro-rata share of the sale proceeds, whichever is greater. In a Participating preference (predatory 'double dip'), the investor gets their principal investment back FIRST, and then also takes their percentage share of whatever proceeds remain, severely diminishing founder payouts.

Why is Full Ratchet Anti-Dilution dangerous for founders?

Full Ratchet anti-dilution reprices all previous investor shares to the lowest price per share in any future down-round, regardless of how small the new round is. This causes catastrophic dilution to founders. Founders should always insist on Broad-Based Weighted Average anti-dilution.

Shareholders Agreement (SHA) Red Flag Scanner (2026)

Key Investment Clauses

Select the terms offered in your term sheet or SHA

1. Liquidation Preference Structure *

2. Anti-Dilution Protection *

3. Drag-Along Rights Threshold *

4. Investor Veto / Affirmative Voting Scope *

5. Founder Bad Leaver Definition *

Founder Risk Rating

15%

Clean, Market-Standard Term Sheet

Liq Preference

Founder Safe

Anti-Dilution

Market Standard

Drag-Along

Protected

Operational Veto

Reasonable

Term Sheet Evaluation: The current terms reflect standard venture capital practices. Founders maintain board governance and down-round protection.

Upload SHA for AI Clause Review →

Need to set up founder reverse vesting first? Co-Founder Generator →

The 4 Most Dangerous Traps in Indian Startup Term Sheets

When raising institutional capital from angel networks or venture capital funds, founders often focus solely on the pre-money valuation. However, onerous legal terms in the Shareholders Agreement (SHA) can completely wipe out your equity or cause involuntary founder ouster.

Participating Liquidation Preference: Termed the "double-dip", this enables the investor to recover their principal investment first, and then take their full equity percentage of whatever money remains. Always counter-offer with 1x Non-Participating.

Full Ratchet Anti-Dilution: If you raise capital at ₹100/share and subsequently issue even a single share at ₹50 in a down-round, the investor gets their entire stake repriced to ₹50 as if they had invested at that valuation from day one. Counter with Broad-Based Weighted Average.

Unconditional Drag-Along: Allows investors to force founders to sell their shares to a third-party buyer at whatever price the investor chooses. Always ensure drag-along requires Founder written consent or a minimum return hurdle (e.g. 3x-5x MOIC).

Affirmative Voting Items (Reserved Matters): Giving investors veto power over routine operational hiring, salary increments, or vendor contracts paralyzes executive authority. Limit vetoes to fundamental structural items (M&A, debt >₹50L, IPO).

Frequently Asked Questions on Shareholders Agreements

Is a Term Sheet legally binding in India?

Typically, term sheets are explicitly marked "Non-Binding" except for confidentiality, exclusivity (no-shop period), and governing law clauses. However, terms agreed upon in the term sheet form the non-negotiable basis of the binding Shareholders Agreement (SHA) and Share Subscription Agreement (SSA).

What is ROFR vs ROFO?

A Right of First Refusal (ROFR) requires a selling shareholder to first find a bona fide third-party offer, and then offer those exact terms to existing investors. A Right of First Offer (ROFO) requires the seller to first offer the shares to existing investors before seeking an outside buyer. Founders generally prefer ROFO as ROFR makes external buyers hesitant to spend time negotiating.

Key Investment Clauses

The 4 Most Dangerous Traps in Indian Startup Term Sheets

Frequently Asked Questions on Shareholders Agreements

Is a Term Sheet legally binding in India?

What is ROFR vs ROFO?

Upload Your Full SHA to ContractShield AI