A term sheet is a non-binding legal document outlining the fundamental terms, commercial conditions, valuation, and governance agreements under which an investment will be executed.
CORPORATE WISDOM · M&A AND TRANSACTIONS
Term Sheet
In One SentenceA preliminary document setting out the key commercial terms of a proposed transaction.
Core Structure = Valuation + Investment Quantum + Liquidation Preference + Board & Governance Rights
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PRACTICAL FRAMEWORK
Executive Perspectives & Ground Reality
The initial agreement letter between founders and investors that establishes the ground rules, valuation, and rights before lawyers draft long, binding legal contracts.
An engagement before marriage. It outlines what both parties expect from the relationship—how much money will be invested, what rights each has, and what happens if things go wrong.
Key clauses: ₹25 crore pre-money valuation, ₹5 crore investment for 16.7% equity, 1x non-participating liquidation preference, 1 board seat for investor, 60-day exclusivity period.
Founders often celebrate signing a term sheet as if the money is already in the bank. In reality, 20% to 30% of signed term sheets fall apart during confirmatory due diligence.
Pay intense attention to non-valuation terms: liquidation preference, affirmative voting rights, drag-along rights, and exclusivity clauses can be far more consequential than valuation.
What Term Sheet Is Not
Term Sheet and Legally Binding Contract
Most commercial terms, including proposed valuation and investment size, are non binding until definitive shareholder agreements are signed.
Term Sheet and Guaranteed Deal Closure
A signed term sheet merely opens the door for confirmatory due diligence; deals frequently collapse when unexpected liabilities emerge.
Term Sheet and Pure Valuation Summary
Focusing solely on the headline valuation while ignoring liquidation preferences, veto rights, and anti dilution clauses compromises long term control.
Term Sheet and Permanent Friendly Alignment
Regardless of cordial negotiation meetings, term sheet covenants dictate how disputes and emergency exits are enforced when performance falters.
Questions Business Leaders Ask About Term Sheet
Which clauses in a term sheet are legally binding?
Typically Exclusivity (No-Shop clause) and Confidentiality; commercial terms remain subject to definitive documentation.
What is a 1x non-participating liquidation preference?
In a sale, the investor gets either their original investment back OR their pro-rata share of proceeds, whichever is greater.
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