Want to know about Investment Documents? Know what a Term Sheet is!



Every new-age entrepreneur starting a Company is banking on raising eternal investment for scaling up their business to the next level!

A word of caution for all of those looking to raise investment or fund a Company - I recommend you to know what legal documents you require and get them tailor-made to your requirements!

Terms like a Term Sheet, a Shareholder’s Agreement, a Subscription Agreement, a Share-Purchase Agreement, vesting of equity, ROFR, Drag along rights, Tag along rights, Affirmative rights, Liabilities, Indemnities, etc. might sound alien to you - but it’s essential for your interest and your Company’s benefit!

Today, in this post, I’m discussing what a Term Sheet is in detail.

What is a “Term Sheet”?

A term sheet is a non-binding agreement that stipulates the basic terms and conditions under which an investment shall be made. It is a basic document with the help of which more detailed legal documents like a Shareholder’s Agreement, Share Subscription Agreement, Share Purchase Agreement etc. are developed and hence opens the room for negotiations. It acts as an offer to investor laying down the specific conditions. It includes the key deal terms including valuation and can also include some binding terms like funding, confidentiality and governing law, liquidation of Company.

The term sheet, is a very important document that helps in striking a deal with the investor during investment. It is a document used during Angel investment or Venture Capital Funding. It includes terms to which the parties have informally agreed to. Most of the term sheets include the details of who the investor is, name and identities of the investors and founders, the pre-money valuation of the company, investment amount, liquidity details, funding amount, etc.

The following are the standard terms that a term sheet should contain-

  • Price/Valuation

This is a very important term which a company needs to smartly formulate as the potential investors will look at the value of your company and then invest. In other terms, it is evaluating your business in terms of money for the potential investors.

  • Type of Security

This clause discusses the type of security in which an investor can invest. These include equity capital, preference share capital, etc.

  • Voting Rights

This clause discusses the voting rights which are available with the investor. Usually, an equity shareholder has voting rights equal to the number of shares he holds. Section 47 of the Companies act, 2013 explains when the preference shareholders can get voting rights.

  • Right to First Refusal

Some investors have the right to be asked first when a company issues new securities.

  • Dividends and redemption

The preference shareholders have a preference right over the dividends and over profits at the time of winding up of the company. This clause discusses the details of dividends and redemption of shares.

In conclusion, we can say that a term sheet is the foundation stone upon which the relationship between the investor and the company is laid. It is advised that the term sheet be drafted with water-tight terms with the help of an advocate for proper advice and a long-term relationship between the parties and to avoid disputes and litigation costs.