How to read the paper

Part 15 of 21 in A Guide for the First-Time Indian Angel Investor← Part 14Part 16 →

This chapter explains the key terms and considerations for first-time Indian angel investors when evaluating investment documents. It highlights the importance of understanding valuation, preferences, dilution, and other critical clauses.

Valuation is the number everyone repeats. Preference, dilution, and who can force a sale are the numbers that decide what you get.

First-time angels negotiate the pre-money and ignore the rest. The rest is the investment. An Indian seed round is usually preference shares, often compulsorily convertible, sometimes a convertible note or a SAFE-like instrument with a cap. You are not buying the story on the slide. You are buying a place in a queue.

The queue

Liquidation preference decides who gets paid first if the company is sold for less than the fantasy. A 1x non-participating preference is ordinary: the new money gets its capital back, or converts, whichever is better. A participating preference, or a multiple above 1x, means the new money gets paid and then shares what remains. If that stack sits above your ordinary shares, a “successful” sale at twice the last round can still return you little. Ask where you stand. If the answer is a shrug, you are at the back.

The pool and the next round

An ESOP pool created before your money arrives dilutes you. A pool the founder promises to create later dilutes you then. Both are legitimate. What is not legitimate is forgetting them when you calculate ownership. Pro-rata rights — the right to put in your share of the next round — are how you defend the winner. They are useless if you have spent the sleeve. Anti-dilution that is broad-based and weighted is a grown-up clause. Full ratchet anti-dilution is a way for a later down round to punish you twice. Drag-along lets a majority force your sale. Information rights let you see the MIS. Most small cheques get the standard document. Read it anyway, once, with a lawyer, so the second time you know what you are waving through.

Instruments that feel like shares and are not yet

A convertible note or a capped instrument is a loan or a right that becomes shares later, usually at a discount to the next round. It is a reasonable way to invest before a price is knowable. It is also a way to discover, two years on, that the cap was fantasy and the discount bought you very little of a company that raised at a huge price — or that the company never raised, and you are an unsecured creditor of a memory. Write down the cap, the discount, the maturity, and what happens if nothing happens. “It converts eventually” is not a term.

Secondaries dressed as primaries

In hot markets, part of the round is a founder or an early angel selling. That can be healthy: a founder who can pay a school fee is a founder who stays. It can also be the exit, with you as the buyer. Ask what percentage of the round is primary, who is selling, and why. If most of the money is leaving, you are providing liquidity, not funding growth. Price that service honestly.