Term sheet
What Term sheet means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionA term sheet is the short, mostly non-binding document in which an investor sets out the proposed valuation, investment amount, share type, board rights and key protections before due diligence and final agreements.
A term sheet is two to six pages that fix the economics and control of a round: pre-money valuation, amount, instrument (usually compulsorily convertible preference shares in India), ESOP pool to be created before the round, liquidation preference, anti-dilution, board seats, information rights, founder vesting and exclusivity. Only the exclusivity, confidentiality and cost clauses bind; the rest becomes binding in the shareholders agreement and share subscription agreement. You meet it at the end of a fundraising process, after the pitch and the investor's partner meeting, and it typically takes two to four weeks of negotiation before diligence starts. What it means for you: everything in the term sheet is negotiable, and everything left vague will be resolved in the investor's favour later, so agree the pool, preference and consent matters here, not in the long-form documents.
How Term sheet works
A term sheet is issued by the lead investor after its investment committee has approved the deal in principle, and it sets the commercial terms the long-form documents will follow. The economic clauses are the pre-money valuation (with the ESOP pool, usually enlarged to 10% or more, counted in the pre-money so that the dilution falls on existing holders), the amount and the instrument, in India almost always compulsorily convertible preference shares, the liquidation preference, anti-dilution (broad-based weighted average is market; full ratchet is aggressive), pre-emptive rights and the conversion ratio.
The control clauses are board composition and observer rights, the list of reserved matters needing investor consent, information rights, founder vesting and lock-in, transfer restrictions (right of first refusal, tag-along, drag-along), non-compete, and the exit expectation. Procedural clauses cover due diligence (financial, legal, tax, technical), conditions precedent to closing, exclusivity (a no-shop period of 30 to 60 days), confidentiality, who bears legal costs, and governing law. Only exclusivity, confidentiality, costs and governing law are stated to be binding.
After signature, diligence runs for four to eight weeks, the SSA and SHA are drafted on the term sheet's basis, the board and shareholders approve the issue under Sections 42 and 62(1)(c) with a registered valuer's report, and the round closes when conditions precedent are met: money is received in a separate bank account, shares are allotted within 60 days, PAS-3 is filed within 15 days of allotment, and for a foreign investor the FEMA pricing certificate is obtained and FC-GPR is filed within 30 days of allotment.
A Mumbai fintech receives a term sheet on 1 September 2026: ₹8 crore for 20% at a ₹32 crore pre-money, CCPS with a 1x non-participating preference, broad-based weighted average anti-dilution, a 12% ESOP pool created pre-money, one board seat, a 45-day exclusivity and a list of eleven reserved matters. The founders negotiate the pool down to 10% and the reserved matters down to eight over two weeks, sign on 16 September, and close on 12 November after diligence, allotting shares on 14 November and filing PAS-3 on 25 November.
Mistakes we see with Term sheet
- Treating the valuation headline as the deal and ignoring that a 12% pool created pre-money lowers the effective price by more than a modest valuation cut would.
- Signing exclusivity with one investor before other conversations have reached a term sheet, which removes all leverage for the next six weeks.
- Accepting full ratchet anti-dilution, which can hand the investor a large additional stake if the next round is priced lower.
- Leaving founder vesting and leaver terms to be settled in the long-form documents, where the investor's draft sets the default.
Last updated 19 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
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Questions founders ask about Term sheet
Is a term sheet legally binding?
Mostly not. The economic and control terms are an agreed basis for the definitive documents, and either side can walk away, though doing so without reason costs reputation. The clauses on exclusivity, confidentiality, costs and governing law are expressed to be binding and are enforceable.
How long does it take from term sheet to money in the bank?
Six to twelve weeks is typical for a seed or Series A: four to eight weeks of due diligence and document negotiation, then a week or two for board and shareholder approvals, the valuation report, bank receipt and allotment. Foreign investors add the FEMA pricing certificate and bank KYC steps.
What is pre-money versus post-money in a term sheet?
Pre-money is the value placed on the company before the new money; post-money is pre-money plus the amount raised. The investor's stake is the investment divided by the post-money. Check whether the ESOP pool and any convertible notes are counted in the pre-money, because that changes the price per share.