The bridge between an investor and a founder. It binds neither of them, and it decides almost everything, because whatever it settles is what the binding documents are drafted from.
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The document that sets out the basic terms of a proposed investment, before anyone is committed to it.
A term sheet is a legal agreement setting out the basic terms and conditions of a proposed investment transaction. It is not legally binding, and that is the point of it: it gives the founders and the investors an equal chance to put their views about a future investment before either side is committed.
It is backed by the agreements that follow, which define the whole of the transaction and do bind. One of those is the share subscription and shareholders agreement, usually shortened to SSHA. Once the SSHA takes effect, the term sheet automatically dissolves.
Nowadays both investors and founders draft term sheets to strengthen their negotiating rounds, so understanding what one is has stopped being optional for anyone raising money.
A term sheet is where a point is cheap to negotiate. Reopening the same point once the long-form documents are being drafted costs time, fees and goodwill.
Investment transactions get long and tedious. One sheet carrying every basic detail of the proposed transaction is what lets both sides relax about the rest.
Non-binding or not, it covers all the essential aspects of a round, and those aspects are then negotiated with each side’s legal team before anything is finalised.
Both sides can act in their own interests and modify the terms before signing anything. That is far harder once the long-form drafting has started.
The whole purpose is to settle the important points before they become binding, which saves time, cost and energy for everyone involved.
Seven points. Leaving one out does not delay it. It decides it, against you.
Clear rights and liabilities need clearly identified parties. The term sheet should define who the promoters, founders and directors are, and who the investor is.
The valuation of the company, the investment amount, the anti-dilution provision and the shareholding structure that results.
How far the sheet binds the parties, and a clear statement that it creates no obligation on either of them beyond the clauses that are meant to bind.
How the proceeds are divided between the investor and the promoters if the company is liquidated. It is the clause founders understand last and are affected by most.
The composition of the board, the quorum and the voting rights. In some rounds the investor also takes an affirmative vote on specified business matters.
Any restriction on transferring shares. If there is one, it belongs in the term sheet rather than appearing for the first time in the long-form draft.
How and when the investor may exit the investment. The options are decided between the parties according to their own preferences, and the time to decide them is now.
Two stages of one deal. This is the one that binds nobody, and it is the one that decides everything the other one says.
| Attribute | Term sheet | Shareholders agreement |
|---|---|---|
| Where each one sits | ||
| FirstBefore the diligence and the long-form documents, while the parties are still deciding whether there is a deal to do. | At completionOnce the terms are settled and the diligence is done. It is commonly combined with the share subscription agreement into a single SSHA. | |
| NoNot legally binding on any of its parties, which is the point of it: both sides can put their position without committing to it. Confidentiality and exclusivity clauses inside it are usually the exceptions and are drafted to bind. | YesA valid and legally binding agreement governing the investment and the running of the company after it. | |
| It dissolvesOnce the binding agreement comes into effect, the term sheet automatically falls away. Anything in it that was not carried across is gone. | It governsIt stays in force for as long as the shareholders hold their shares, and it is what a dispute between them is decided against. | |
| What it decides | ||
| Founders and investorIt should identify precisely who the promoters, founders and directors are, and who the investor is. Vagueness here is what makes the later documents slow. | All the shareholdersIncluding founders who are not taking new money. It regulates their rights between themselves as much as against the incoming investor. | |
| The commercial shapeValuation, investment amount, shareholding structure, anti-dilution, liquidation preference, board composition, share transfer restrictions and exit options. | How the company runsManagement and control, the directors, the shareholding, and the rights and obligations of each shareholder: the term sheet’s commercial points turned into enforceable machinery. | |
| HereThis is where a point is cheap to argue. Everything agreed here is what the lawyers then draft, and reopening it at the long-form stage costs time, fees and goodwill. | On the draftingBy this stage the commercial terms are settled. What is still open is whether the drafting actually delivers what the term sheet said it would. | |
| Next step | Get started | Know more |
Swipe the table sideways, Term sheet stays in view. Open any attribute to read the detail behind both answers.
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If the investment is coming from a fully functioning venture capital firm, they will usually supply one.
An angel investor who is less familiar with how the documents work may ask the company to prepare it instead. Either party may legally draft it.
No. It is a basic document covering the major provisions of a startup investment and is usually not binding.
Everything entered into after the negotiations it starts, the shareholders agreement and any employment contract, is completely binding on its parties.
Not at all under Indian law. It works as a planner for the round, which is what makes the process flexible, so it is always advisable to have one before raising funds from a third-party investor.
It depends entirely on the rounds of negotiation between the business owners and the investors. It can be done in one or two weeks, or it can run for months.
The main factor is how well the interests and conditions of both parties are protected in the sheet. A term sheet that safeguards everyone’s rights shortens the negotiation rather than lengthening it.
Once the term sheet is discussed and finalised, the parties enter into a valid, legally binding agreement governing the investment: the share subscription and shareholders agreement.
Once the SSHA comes into effect, the term sheet automatically dissolves. Anything that was in the term sheet but did not make it into the SSHA is gone.
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