If you’re raising capital, the term sheet is one of the most important documents you will sign before any money comes in.
It is also one of the most misunderstood.
This guide shows how term sheets are structured in India, explains what the main clauses mean, and includes a template founders can use as a reference.
What is a term sheet?
A term sheet is a preliminary document that sets out the key commercial and legal terms of a proposed investment in a company.
It serves three main purposes:
- It aligns founders and investors on economics, control, and exit expectations early.
- It acts as a reference point for drafting the final transaction documents.
- It is usually non-binding, except for specific provisions such as confidentiality, exclusivity, and governing law
In India, once a term sheet is signed, parties typically move into due diligence and begin drafting the definitive agreements. These are usually the Share Subscription Agreement and the Shareholders’ Agreement.
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Term sheet format in India
While the exact layout can vary, most equity term sheets follow a broadly consistent structure. Understanding this structure helps founders know where risk and leverage usually sit.
1. Transaction details
This section captures the headline economics of the deal. It usually includes:
- the company name and a short business description;
- promoters or founders;
- the existing capital structure;
- the instrument being issued (equity shares or preference shares);
- the valuation (pre-money or post-money); and
- the total investment amount.
2. Board composition and governance
This section explains how the company will be governed after the investment.
It commonly covers:
- the total number of directors;
- investor director or board observer rights; and
- approval thresholds for board and shareholder decisions.
In practice, governance clauses often matter more than ownership percentages. They decide who can approve, block, or influence key decisions.
3. Investor rights
Investor protection rights are listed here. These usually include:
- pre-emptive rights on future share issuances;
- anti-dilution protection;
- information and inspection rights; and
- affirmative voting matters, often referred to as investor veto rights.
These clauses protect investors in downside scenarios and during future fundraising rounds.
4. Founder obligations
This section sets out ongoing commitments expected from founders.
Common provisions include:
- founder lock-in periods;
- vesting or re-vesting schedules; and
- restrictions on share transfers.
Re-vesting for existing founders is common in early-stage deals and often catches first-time founders off guard.
5. Exit and liquidity
Exit clauses explain how and when investors expect to realise returns.
They often cover:
- IPO conditions or timelines;
- strategic sale options;
- drag-along rights; and
- expected exit time horizons.
Exit terms can have a greater long-term impact than valuation, especially if timelines are aggressive or rights are one-sided.
6. Conditions precedent
Conditions precedent are actions that must be completed before the investment can close.
These usually include:
- completion of legal and financial due diligence;
- receipt of required regulatory approvals, including filings with the ROC where applicable;
- amendments to the company’s Articles of Association; and
- execution of the final transaction documents.
If these conditions are not met, the deal can be delayed or may not close at all.
7. Binding vs non-binding clauses
Most term sheets clearly separate:
- clauses that are legally binding; and
- clauses that are indicative and subject to definitive agreements.
Commercial terms like valuation, ESOP pools, and investor rights usually become enforceable only once they are included in the Share Subscription and Shareholders’ Agreement.
In contrast, clauses such as confidentiality, exclusivity (no-shop), governing law, and costs are often binding immediately after the term sheet is signed.
Understanding this distinction is critical. It determines what can be enforced and what remains open to negotiation.
Term sheet template for Indian companies
While the overall structure of term sheets is fairly standard, they are often customized to reflect jurisdiction-specific legal and market considerations.
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How founders should approach creating a term sheet
Drafting a term sheet is less about filling in a template and more about aligning expectations early.
A practical approach usually involves:
- aligning on valuation, investment amount, and expected dilution;
- deciding whether the investment will be in equity or preference shares;
- agreeing on board structure and investor approval rights;
- finalising the ESOP pool size and whether it is created before or after the investment;
- discussing exit routes and timelines early; and
- clearly identifying which clauses are binding.
Founders should always have a term sheet reviewed by qualified legal counsel before signing.
Can a term sheet be legally binding?
In most cases, no.
Term sheets are generally drafted so that commercial terms are non-binding. This gives both parties flexibility during due diligence and the preparation of definitive agreements.
However, certain clauses are usually binding from the start. These often include:
- confidentiality;
- exclusivity or no-shop obligations;
- governing law and jurisdiction; and
- allocation of transaction costs.
What is the difference between a termsheet and an MOU (Memorandum of Understanding)?
A term sheet and a Memorandum of Understanding (MOU) are both preliminary documents, but they serve different purposes.
Term sheet
- used mainly in fundraising and investment transactions;
- focuses on commercial terms, governance, investor rights, and exits;
- largely non-binding, with specific clauses carved out as binding; and
- acts as the blueprint for final investment documents.
MOU
- used in partnerships, collaborations, or strategic discussions;
- records intent and scope of cooperation;
- can be binding or non-binding, depending on how it is drafted.
What happens after a term sheet is signed?
Signing a term sheet doesn’t finish the fundraise; it starts the process of closing the round.
Typically, the next steps are:
- Due diligence – investors review legal, financial, and compliance records.
- Definitive agreements – lawyers draft the final contracts and amended Articles.
- Final negotiations – some terms are refined during drafting.
- Approvals and filings – board, shareholder, and regulatory approvals are completed.
- Closing – documents are signed, shares are issued, and funds are transferred.
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