Investment Agreements

A Term Sheet is a preliminary, non-binding document that outlines the basic terms and conditions of an investment. While most of its clauses (like valuation, investment amount) are not legally enforceable, certain clauses, such as 'Confidentiality' and 'Exclusivity' (or 'No-Shop'), are typically made legally binding.

The SSA governs the one-time act of the investor "subscribing" to (or buying) new shares from the company. Its purpose is fulfilled once the investment is made. The SHA, on the other hand, is a long-term document that governs the ongoing relationship and mutual rights/obligations of all shareholders after the investment is complete.

Key clauses include liquidation preference (who gets paid first on an exit), anti-dilution provisions (protection from future down-rounds), board seats, veto rights (key decisions investors can block), and exit provisions like ROFR, Tag-Along, and Drag-Along rights.

Equity dilution happens when a company issues new shares to investors, reducing the percentage of ownership of existing shareholders (including founders). While dilution is a natural part of fundraising, it can be managed by negotiating a fair valuation and understanding the impact of clauses like ESOP pools and anti-dilution provisions.

Legal due diligence is an investigation conducted by investors into a company's legal affairs before an investment. They check corporate records, contracts, IP ownership, employment issues, and compliance. A clean due diligence report gives investors confidence and can speed up the funding process significantly.

The company must be eligible to receive FDI under the relevant sector's policy (most are under the "automatic route"). The investment must comply with RBI's pricing guidelines (shares cannot be issued to foreigners for less than their fair market value), and mandatory reporting must be done via the FIRMS portal (Form FCGPR) within 30 days of allotment.

A capitalization table, or "cap table," is a spreadsheet that details the equity ownership of a company. It lists all the company's securities (common shares, preferred shares, options) and who owns them, showing ownership percentages on a fully diluted basis. It is a critical tool for managing equity.

Investors often require founders to create an ESOP pool before the investment. This is typically calculated on the "pre-money" valuation, meaning the founders' equity is diluted to create the pool, not the new investor's. It's a key negotiation point that impacts founder ownership.

"Closing" is the final step where all conditions precedent are met, the definitive agreements (SSA, SHA) are signed by all parties, and the investor wires the investment funds to the company's bank account. In return, the company officially allots the new shares to the investor.

Templates are a risky one-size-fits-all solution for a situation that is unique to your company. They often lack crucial protections, may not be compliant with Indian law, and fail to capture the specific commercial understanding of your deal. A poorly drafted agreement can lead to costly disputes, loss of control, and problems in future funding rounds. Professional legal advice is an investment in your company's future.