Term Sheet
A non-binding summary of the key commercial and governance terms an investor proposes before drafting the full shareholder agreement. Sets the negotiating baseline — most economic decisions are made here, not in the final documents.
Term Sheet is a document — typically 8–20 pages — that summarises the key commercial and governance terms under which an investor proposes to invest in a startup. It is non-binding in substance (except for the exclusivity and confidentiality clauses) and serves as the negotiating template from which the full legal documentation is subsequently drafted: the shareholders' agreement, subscription agreement, and amended articles of association.
Most of the meaningful economic negotiation in a funding round happens at the term sheet stage. By the time the full shareholder agreement is being drafted, key terms are typically settled — legal negotiation at that stage focuses on edge cases and definitions, not the core economics.
Who it applies to
- Founders receiving a first investment proposal from a VC fund, angel syndicate, or institutional investor
- Founders who want to understand what they are agreeing to before legal advisors are involved
- CAs and legal advisors reviewing the commercial terms before a startup signs
Key sections of a term sheet
Economic terms:
| Term | What it determines |
|---|---|
| Pre-money valuation | Company valuation before the investment; determines investor equity % |
| Investment amount | Capital committed by the investor in this round |
| Share class | Typically CCPS in Indian VC rounds |
| Liquidation preference | Investor priority in a low-value exit; 1x non-participating is market standard |
| Anti-dilution | Conversion ratio adjustment in a down round; weighted average is market standard |
| ESOP pool | Size of the option pool, often set or topped up pre-investment |
Governance terms:
| Term | What it determines |
|---|---|
| Board composition | Number of investor board seats; independent director requirements |
| Reserved matters | Decisions requiring investor consent (new share issuance, M&A, key hires, budget) |
| Drag-along rights | Investor's right to compel a sale if a majority of shareholders agree |
| Tag-along rights | Minority investor's right to join a sale if the majority sells |
| Information rights | Frequency and format of financial reporting to investors |
| ROFR / ROFO | Right of First Refusal or First Offer on secondary transfers of founder shares |
Process terms:
| Term | Binding? |
|---|---|
| Exclusivity (no-shop) | Yes — prevents founder from talking to other investors for 30–90 days |
| Confidentiality | Yes — prevents disclosure of term sheet terms |
| Conditions to close | Non-binding — sets due diligence and CP expectations |
What most founders miss
Non-binding does not mean unimportant. The term sheet sets the negotiating baseline. Once signed, reversing a term requires re-opening the negotiation — the investor will point to the signed term sheet as evidence of prior agreement. Negotiate hard on every term before signing; attempting to improve terms after signing signals bad faith and can derail the round.
Reserved matters constrain operations more than valuation. Founders who accept a high valuation alongside broad reserved matters — investor veto over hiring above a salary threshold, veto over any new contract above ₹50 lakh, veto over entering new geographies — can find themselves operationally paralysed. The cumulative impact of a long reserved matters list on day-to-day decision-making is sometimes more damaging than the economic terms.
The exclusivity clause is the only urgency. Once you sign, the clock starts on the exclusivity period. If the investor delays due diligence or document drafting, you remain bound from talking to others. Negotiate a reasonable exclusivity period (30–45 days is common; resist anything over 60 days) and insist on a termination right if the investor fails to meet reasonable milestones.
Get legal advice before signing. Term sheet review by a startup-experienced lawyer or CA takes 2–3 days and typically costs ₹15,000–₹50,000. The review is worth it: a term sheet with participating preference, full ratchet anti-dilution, and broad reserved matters will cost far more in diluted economics at exit than the review fee.
Clean corporate records cut weeks off the close. Investors conduct due diligence after the term sheet is signed. Missing PAS-3 filings, incorrect share registers, undisclosed FEMA violations, or IP not properly transferred to the company are common discoveries that delay the close or give investors leverage to renegotiate terms. The best preparation for a term sheet is having all corporate records clean before the conversation begins.
See also
- CCPS (Compulsorily Convertible Preference Shares) — the share class specified in most Indian VC term sheets
- Liquidation Preference — the exit economics term most frequently negotiated at term sheet stage
- Anti-Dilution — the down round protection mechanism; weighted average vs. full ratchet is a key term sheet decision
- RoC Annual Compliance — clean RoC filings accelerate due diligence after a term sheet is signed
- FEMA (Foreign Exchange Management Act) — foreign investor term sheets trigger FEMA compliance obligations at round close; FC-GPR must be filed within 30 days of allotment
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