Conditions precedent in a term sheet: Indian startup deals

The term sheet is signed, the founder relaxes, and the investor's lawyer sends a list headed "Conditions precedent". That list decides when, and whether, the money moves. Read it as a to-do list with a deadline attached.

This guide explains how conditions precedent work in Indian startup rounds, for investors writing them and founders meeting them. It's educational, not legal advice; a lawyer should draft and review the conditions for any real deal.

What are conditions precedent in a term sheet?

Conditions precedent (CPs) are things that must be done or true before the investor is obliged to pay for the shares. The term sheet lists them in outline; the share subscription agreement (SSA) spells them out, and closing happens only when each is met or the investor waives it.

In legal terms, an SSA with CPs works like a contingent contract. The Indian Contract Act, 1872 defines one in section 31 as a contract to do something if a collateral event does or doesn't happen. Section 32 says it can't be enforced until that event has happened.

That's why an investor isn't in breach for refusing to pay while a CP is open. It's also why a vague CP is dangerous: if nobody can say whether the event has happened, nobody can say whether the contract is enforceable.

Which conditions precedent are typical in Indian startup deals?

Most CPs in Indian startup rounds fix what diligence found or lock in what the investor is paying for: a clean cap table, IP owned by the company, an approved ESOP plan, compliance gaps closed, key hires on signed agreements, and the approvals that make the share issue itself valid.

Condition precedent	Why the investor asks	What proves it at closing
Cap table clean-up	Every holding must trace to a valid allotment or transfer	Updated register of members, PAS-3 filings, board minutes
IP assignment	Code, designs and brand must belong to the company	Signed assignments from founders and contractors
ESOP plan approval	The pool size was priced into the round	Board approval and the shareholders' special resolution
Compliance fixes	Late filings carry penalties and signal weak controls	Filed returns and a CA's confirmation
Key hires' agreements	The team is part of what the investor is buying	Signed employment, confidentiality and IP terms
Corporate approvals	The issue must be valid	Board resolution, special resolution, amended Articles

Each row has a deeper check behind it. For the first, see cap table red flags to check before investing. For the second, IP assignment for startups in India explains why code stays with its author until a written assignment moves it.

The ESOP condition matters because an option scheme needs a special resolution under section 62(1)(b) of the Companies Act, 2013. The ESOP pool checks before investing cover what to verify. Watch for any CP that depends on someone outside the company, such as a customer's consent: those are the ones that miss deadlines.

How are conditions precedent different from conditions subsequent?

Conditions precedent must be met before the money moves; conditions subsequent are promises the company performs after closing, within a set time. Filings that can only follow allotment are natural conditions subsequent, and so are fixes the investor agrees can wait.

Some conditions subsequent come from the law itself. Section 42(8) of the Companies Act gives 15 days from allotment to file the return of allotment in Form PAS-3. For foreign investors, RBI's reporting regulations require Form FC-GPR within 30 days of issue. Others are negotiated, such as filing a trademark application soon after closing.

The difference is leverage. Before closing, the investor can simply not pay. After closing, a missed condition subsequent is a breach of contract, with only the remedies the agreement provides. So investors pull open items into CPs, and founders push them into conditions subsequent.

What is a long-stop date and why does it matter?

The long-stop date is the deadline by which every condition precedent must be met or waived. If it passes with CPs still open, either side can usually terminate the SSA. No law fixes the date; the parties agree it, and it should come from a realistic closing checklist.

Section 35 of the Contract Act shows why the date needs care: a contract contingent on an event happening within a fixed time becomes void if the event hasn't happened when the time runs out. Good drafting says what happens at the long-stop date, who may extend it, and whether an extension needs both sides.

Deals do stall in this window. In a survey of 885 VCs, firms offered 1.7 term sheets for each deal they closed, and the paper notes that legal documents and warranties can sink a deal after signing. The data is mostly American. For the full Indian sequence, see the term sheet to closing timeline.

A condition precedent is a promise with a deadline. Agree the deadline before you agree the promise.

How should investors and founders negotiate conditions precedent?

Keep CPs few, specific and within the company's control, with named evidence for each. Investors should insist on the items that affect value or the validity of the shares; founders should move administrative fixes into conditions subsequent with firm dates. Both sides gain from a written checklist agreed the week the term sheet is signed.

• Be specific: "IP assignments signed by the 3 founders and 2 named contractors" beats "IP matters resolved to the investor's satisfaction".
• Name the evidence: agree which document proves each CP, so closing isn't a debate.
• Limit discretion: "satisfactory to the investor" is close to a walk-away right; founders should narrow it to objective tests.
• Sort what can wait: move filings and minor fixes into conditions subsequent, each with a date and a remedy.
• Date it from the checklist: give extra time to any CP that needs a third party, such as a bank, a former co-founder or a regulator.

Investors should also check that CP evidence ties back to public filings, not just to documents the company prepared; compliance checks before investing shows where to look.

Questions

What does conditions precedent mean in a term sheet?

Conditions precedent are actions or facts that must be in place before the investor is obliged to pay for the shares, such as a cleaned cap table or signed IP assignments. The term sheet lists them in outline, and the share subscription agreement sets them out in detail with the evidence needed at closing.

What happens if conditions precedent are not met?

If any condition is still open at the long-stop date and the investor hasn't waived it, the share subscription agreement usually lets either side terminate. Nothing is owed for the shares, but the time, legal fees and momentum are lost, so both sides often agree an extension instead.

Can an investor waive a condition precedent?

Usually, yes. Conditions precedent exist to protect the investor, so most agreements let the investor waive any of them in writing, sometimes converting it into a condition subsequent with a deadline after closing. The waiver and any new deadline should be recorded in writing before the money moves.

Are statutory filings conditions precedent or conditions subsequent?

Filings that can only follow allotment are conditions subsequent. Form PAS-3 is due within 15 days of allotment under section 42(8) of the Companies Act, and for foreign investors Form FC-GPR is due within 30 days of issue under RBI rules.

Sources: Indian Contract Act, 1872, sections 31, 32 and 35, India Code · Companies Act, 2013, sections 42 and 62, India Code · RBI, FEMA 395 reporting regulations, regulation 4(1), amended up to 13 June 2026 · Gompers, Gornall, Kaplan and Strebulaev, How Do Venture Capitalists Make Decisions?, NBER Working Paper 22587, 2016

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.