The term sheet, clause by clause

What is a term sheet?

A term sheet is an outline of a funding deal, usually two to six pages long. An investor sends it after deciding to invest and before spending money on legal checks. It covers the price, the amount, the rights the investor gets and the conditions for closing. Once both sides sign, lawyers draft the long documents, such as the share subscription agreement and the shareholders' agreement.

Most of a term sheet is non-binding, meaning either side can still walk away. A few clauses are normally binding, such as confidentiality, the exclusivity period during which the founders agree not to negotiate with other investors, and who pays costs. Even so, a signed term sheet carries real weight, and changing major terms later damages trust.

Which economic terms matter most?

Economic terms decide who gets how much money. The valuation and the amount raised set the investor's percentage. The instrument sets the form: in India often compulsorily convertible preference shares (CCPS), which turn into ordinary shares later. The employee stock option pool, which is usually created before the investment, affects what founders really receive.

Two terms matter greatly when things go badly. Liquidation preference decides who is paid first, and how much, if the company is sold or wound up. A 1x non-participating preference means the investor gets its money back or its share of the sale, whichever is higher. Participating preference lets the investor take its money back and then also share the rest, which costs founders more. Anti-dilution protection adjusts the investor's price if a later round is cheaper.

• Valuation and amount, and whether the valuation is pre-money or post-money.
• Type of shares and any conversion terms.
• Option pool size and timing.
• Liquidation preference: 1x or more, participating or not.
• Anti-dilution: full ratchet or weighted average.

Which control terms matter?

Control terms decide who makes decisions. The board section says how many seats there are and who picks them. A typical early-stage board has two founders and one investor, and sometimes an independent member. Protective provisions, also called reserved matters, list decisions that need the investor's consent, such as raising new shares, selling the company, changing the business or borrowing above a limit.

Other control clauses include information rights, which entitle investors to regular financial reports, and rights of first refusal, which let them buy shares before an existing holder sells to someone else. Founders should read the reserved matters closely, because a long list can slow routine decisions.

What do founders have to commit to?

Investors want founders to stay and work. A vesting clause says founders earn their shares over time, often over four years with a one-year cliff, so that someone who leaves early does not walk away with everything. Many term sheets ask founders to reset or add vesting even on shares they already hold.

Founders may also face non-compete and non-solicit clauses, an obligation to work full time, and lock-in on selling shares. Indian law limits how far non-compete clauses can bind a person after they leave, so enforceability can differ from what a clause appears to say.

What are the exit and transfer clauses?

These describe how investors eventually get their money out. Tag-along rights let minority investors join a sale by the majority. Drag-along rights let a majority force minority holders to sell if a buyer wants the whole company. A right of first refusal and co-sale rights govern transfers between holders. Some term sheets include a timeline by which the company should aim to list on an exchange or be sold, and a right for investors to push for one.

Founders should understand each of these before signing, since they decide who can force a sale and when.

What conditions apply before the money arrives?

A term sheet lists conditions that must be met before closing: satisfactory due diligence, signed final agreements, regulatory approvals, and sometimes key hires or clean-up of legal issues. In India, foreign investment brings extra steps under exchange control rules, including reporting filings after the money arrives.

The term sheet also usually sets an expiry date, so it lapses if not signed in time. A signed term sheet does not guarantee a deal: investors can still withdraw after due diligence if they find problems. Founders should keep talking to other investors until exclusivity starts.

What is the typical process from offer to signing?

The investor usually sends a draft term sheet after a partner meeting. Founders then negotiate the main points, often with a lawyer, through a few rounds of changes. Once both sides agree, they sign, and the exclusivity period starts, commonly for thirty to sixty days. During that time, the investor completes due diligence and the lawyers draft the final agreements.

Founders who have more than one offer should compare them side by side before signing any. Signing one term sheet usually means stopping talks with the others for the exclusivity period, so the decision is hard to reverse. It is better to negotiate before signing than after, when your bargaining power is much weaker.

Which clauses surprise founders most?

Founders are most often surprised by the option pool shuffle, in which the employee pool is carved from the pre-money valuation, by participating liquidation preferences, by broad reserved matters and by new vesting on shares they already own. Another surprise is a clause that lets investors force a sale or a listing after a number of years.

Smaller clauses can matter as well: how the board is changed in future rounds, who pays the investors' legal costs, what counts as a valid reason to remove a founder, and how disputes are settled. Indian agreements often use arbitration, so the place and rules of arbitration are worth reading. A careful read of the whole document, not only the first page, is the best protection.

Term sheets in India also have to fit local law. Instruments must be allowed under the Companies Act and foreign exchange rules, share transfers may need stamp duty, and some rights may need to be placed in the company's articles of association to be effective against the company itself. Lawyers therefore draft the final agreements to match the term sheet while making these rules work. Founders should ask early which clauses will go into the articles and which stay in a private shareholders' agreement, since that affects how they can be enforced.

How should founders approach negotiating?

Price is only part of the deal. Founders should compare offers on the full set: valuation, option pool, liquidation preference, board control and vesting. A lower price with clean terms can be better than a higher price with harsh terms. Founders should also learn about the investor: how they behaved with other companies and how they act in hard times.

Always have a startup lawyer review the term sheet before signing. This guide is general information and not legal advice, and terms differ by deal.

Read next

• Liquidation preference, explained with numbers
• Anti-dilution protection: full ratchet vs weighted average
• Board seats, voting rights and who controls a startup
• What happens in due diligence
• What is a cap table?