Term Sheet Review & Drafting
A term sheet is the short document where a founder and an investor agree the price, the stake and the rights before the long agreements are written. We draft term sheets for founders and review the ones investors send, clause by clause, so you know what you are signing before the money moves.
What it is
A term sheet is a summary of the deal: how much the investor puts in, at what valuation, through which instrument (equity, compulsorily convertible preference shares or a convertible note), and with what rights.
Most of a term sheet is non-binding. The binding obligations come later, in the share subscription agreement (SSA) and the shareholders’ agreement (SHA). A few clauses are normally made binding from the day of signing: confidentiality, exclusivity (the “no-shop” period), costs and governing law. Those clauses are a contract under the Indian Contract Act, 1872, so their wording matters.
Every term then has to fit Indian law. The share issue follows Section 42 or Section 62 of the Companies Act, 2013. A foreign investor also brings FEMA pricing and reporting.
Who it applies to
You are raising your first round
An angel or seed fund has sent a term sheet, or wants you to propose one. You need to know which terms will hurt you in the next round.
You are bringing in a strategic investor
A supplier, customer or family office is buying into your established company. The term sheet decides how much control the promoters keep.
You are the one writing the cheque
Angels who want a clear, fair term sheet without hiring a full deal team this early.
Why it matters
Settle the money terms before signing
Once a valuation or a liquidation preference sits in a signed term sheet, reopening it in the SSA is very hard. The real negotiation happens here.
Keep control of daily decisions
Board seats and veto rights over “reserved matters” decide how freely you run the business. A long veto list can stop you hiring or borrowing without the investor’s nod.
Make sure the law allows each term
A term the Companies Act or FEMA does not allow becomes a problem at closing. A price below fair value for a foreign investor, for example, breaks the Non-Debt Instruments Rules.
Key clauses we check
| Clause | What it decides | What we look for |
|---|---|---|
| Valuation and instrument | Pre-money value, amount, equity or CCPS | Whether the ESOP pool sits in the pre-money, which means only founders bear its dilution |
| Liquidation preference | Who is paid first on a sale or winding up | 1× non-participating is founder-friendly; participating or multiple preferences cost founders more |
| Anti-dilution | Protection if a later round is priced lower | Broad-based weighted average rather than full ratchet |
| Board and reserved matters | Investor director, observer, veto list | Vetoes limited to big decisions |
| Founder terms | Vesting, lock-in, non-compete | Reverse vesting with credit for time already served; a post-exit non-compete is generally void under Section 27 of the Contract Act |
| Transfer and exit | ROFR, tag-along, drag-along, exit timeline | Drag-along only above a fair threshold |
| Exclusivity and conditions | No-shop period, due diligence, closing conditions | A short, fixed no-shop period and a clear long-stop date |
Here is the catch: two term sheets with the same valuation can be worth very different amounts to a founder. Picture a Faridabad auto-components software start-up offered ₹2 crore at a ₹10 crore pre-money, with a 2× participating preference. Sell for ₹8 crore and the investor takes ₹4 crore off the top, then shares in the rest. The headline stake was about 17%. The payout is more than half.
Documents required
The deal papers
- The investor’s draft term sheet, if you have one
- Pitch deck and target valuation
From the company
- Memorandum and articles of association
- Current shareholding pattern and any ESOP plan
- Existing shareholders’ or founders’ agreement
- Latest financial statements
About the investor
- Name and type: individual, company, fund, LLP
- Residential status and country, for FEMA
How it works
Write down the deal you think you agreed
We take a short call, read the draft and note the amount, valuation, instrument and timeline.
Mark up or draft the term sheet
We draft it, or mark up the investor’s draft, with a plain note on every clause that moves value or control away from you.
Check it against the Companies Act and FEMA
We test the share issue route and the authorised capital. In practice, a foreign investor changes the most: we check the FEMA price floor and the reporting before anything is signed.
Negotiate with the numbers in front of you
We explain what each concession costs and revise the draft after every round of comments.
Map every step to closing
Once it is signed, we map the closing: SSA and SHA, articles amendment, valuation report, private placement papers and the ROC filings.
Timelines
Fix the end of the no-shop period
The term sheet itself sets the no-shop period. Agree a fixed end date so you are not locked in if diligence drags.
Allot shares within 60 days of the money
In a private placement, shares must be allotted within 60 days of receiving the application money under Section 42(6), and PAS-3 is filed within 15 days of allotment.
Report foreign money within 30 days
If the investor is a non-resident, the company files Form FC-GPR on the RBI’s FIRMS portal within 30 days of allotment.
What happens if you sign without a review
You give away more than the headline stake
A participating preference or a full-ratchet anti-dilution clause can shrink the founders’ share of a sale far below their stake.
The deal stalls at closing
Say a Gurugram D2C brand agrees a price with an NRI angel in Dubai, and the fair-value certificate later comes in higher. The FEMA floor wins, and the price is reopened weeks into diligence.
Penalties land on the company
A private placement that breaks Section 42 can attract a penalty up to the amount raised or ₹2 crore, whichever is lower, under Section 42(10).
Frequently asked questions
Is a term sheet legally binding in India?
Mostly no. A term sheet is usually non-binding on the commercial terms, and the binding obligations come in the share subscription agreement and shareholders’ agreement. But clauses the term sheet itself makes binding, typically confidentiality, exclusivity, costs and governing law, are enforceable as a contract under the Indian Contract Act, 1872. We flag every binding clause in our review so nothing surprises you later.
What is the difference between a term sheet and a shareholders’ agreement?
The term sheet is the summary; the shareholders’ agreement is the detailed, binding contract. A term sheet records price, stake and key rights in a few pages. The SHA sets out each right in full, and the share subscription agreement covers the issue of shares. Investor rights must also be written into the articles of association to bind the company. A good term sheet makes the SHA quick to draft.
What is a liquidation preference?
It is the investor’s right to get money back first if the company is sold or wound up. A 1× non-participating preference means the investor takes either the amount invested or its share of the sale proceeds, whichever is higher. A participating preference lets the investor take both, which costs founders more. In a modest sale this clause can matter more than the valuation. We model the payout at a few sale values so you see the effect.
Can a foreign investor get shares at any price we agree?
No. Under Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, shares issued to a non-resident cannot be priced below fair value. A chartered accountant, SEBI-registered merchant banker or practising cost accountant certifies fair value for an unlisted company. The company then files FC-GPR within 30 days of allotment. We check the term-sheet price against this floor before you sign.
How long should the exclusivity period be?
No law fixes it; it is a commercial term. A no-shop clause stops you talking to other investors while the investor does diligence, and shorter is better for the founder. Insist on a fixed end date, and on the right to walk away if the investor changes the price. With a clear end date, a slow deal never traps you.
Do we need a valuation report before signing a term sheet?
Not to sign it, but you will need one to close. A preferential issue under Section 62(1)(c) must be priced on a registered valuer’s report, and a non-resident investor needs a fair-value certificate under FEMA. An indicative valuation before you agree the price avoids a gap later. Since angel tax under Section 56(2)(viib) no longer applies from FY 2024-25, the focus is on the Companies Act and FEMA reports.
Can a term sheet stop founders from starting a competing business?
Only while they are with the company. Section 27 of the Indian Contract Act makes any agreement restraining a lawful trade or business void to that extent, and courts have held that restraints after the relationship ends are generally unenforceable. A non-compete during the founder’s tenure, plus confidentiality, is usually fine. We redraft overly wide non-competes so the clause protects the investor without being void.
Does Taxhint sign or litigate on the term sheet?
No. We draft and review the term sheet as advisers for your review and decision, and the parties sign it themselves. Any legal notice or court filing arising from the deal must be signed by a practising advocate. We handle the drafting and the Companies Act and FEMA work that follows the round. If an advocate is needed later, we will say so at that stage.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
A non-binding term sheet itself carries no government fee. Government costs arise at closing: stamp duty on the final agreements (state rate, confirmed before the e-stamp is bought), the PAS-3 fee of ₹200 to ₹600 by authorised capital and, if needed, the fee to increase authorised capital.
Ready to begin?
Send us the draft term sheet, or the numbers you have agreed, and we will tell you what each clause costs you before you sign.