Investment & Equity

Term Sheet

In short

A non-binding document that lays out the key terms and conditions of a proposed investment before the lawyers draft the full legal agreements.

A non-binding document that lays out the key terms and conditions of a proposed investment before the lawyers draft the full legal agreements. A term sheet covers valuation (pre-money and post-money), the amount being raised, the type of security (equity or convertible instrument), board composition, investor rights (information rights, pro-rata rights, board seats), liquidation preference, and anti-dilution protection. Although most clauses are non-binding — either party can walk away before signing definitive agreements — a few sections (confidentiality, exclusivity/no-shop, and governing law) are typically binding. In India, term sheets are usually 4–8 pages and are negotiated over 1–3 weeks before moving to definitive documentation (Share Subscription Agreement and Shareholders' Agreement).

How It Works

A term sheet signals serious intent without locking either party in — it lets founders and investors agree on the commercial terms quickly before spending on legal fees for full documentation. The most negotiated clauses are valuation, liquidation preference (does the investor get 1x their money back before anyone else, or more), board composition (how many seats go to investors vs founders), and protective provisions (which decisions need investor consent — new fundraising, large expenditure, hiring/firing the CEO). Once signed, the term sheet triggers an exclusivity period (typically 30–60 days) during which the founder cannot negotiate with other investors while legal due diligence and definitive documentation proceed. A signed term sheet is a strong signal but not a guarantee of closing — deals do fall through during diligence.

Application Process

1. Negotiate the commercial terms — valuation, amount, liquidation preference, board seats — before involving lawyers, to avoid burning legal fees on terms that aren't agreed. 2. Get an experienced startup lawyer to review every clause, especially liquidation preference multiples and anti-dilution ratchets, which materially affect founder returns. 3. Understand which clauses bind you immediately (confidentiality, exclusivity) even though most of the document is non-binding. 4. Negotiate the exclusivity period length — too short pressures diligence, too long blocks you from other options if the deal stalls. 5. Move quickly to definitive documentation once signed — a stale term sheet loses momentum.

Real-World Example

A Series A investor sends a startup a term sheet proposing a ₹40 crore pre-money valuation, a ₹10 crore investment (₹50 crore post-money), one board seat, standard 1x non-participating liquidation preference, and a 45-day exclusivity period. The founders negotiate the board composition down from two investor seats to one, and confirm the liquidation preference is non-participating (investors get either their money back or their percentage of proceeds, not both). Legal teams then spend five weeks turning the term sheet into a Share Subscription Agreement and Shareholders' Agreement before the round closes.

Key Takeaway

A term sheet sets the commercial terms before lawyers draft binding documents. Most of it is non-binding, but the exclusivity and confidentiality clauses aren't — read those carefully before signing.