A term sheet is a preliminary document that sets out the principal commercial and governance terms on which an investor proposes to invest in a company. It serves as a blueprint for the final, binding transaction documents, such as a share subscription agreement and a shareholders' agreement.
The investor usually drafts the term sheet, and its standard form tends to secure extensive protective rights for the investor. Founders should review it closely because, while largely non-binding, it creates a strong moral commitment and frames the power balance for the final deal.
Who it usually favours: The standard form usually favours the investor by securing significant control and downside protection, so the founders should push back on terms that excessively dilute their control or economic rights.
What each one settles in a term sheet, and the wording that shifts the risk.
Why it matters. This clause defines which parts of the term sheet, if any, create immediate legal obligations, such as exclusivity, confidentiality, and cost-bearing.
Watch for. Wording that makes the entire term sheet binding or creates a vaguely worded obligation to 'negotiate in good faith', which may be interpreted as a binding commitment to close the deal.
Why it matters. This determines the price per share the investor pays and the percentage of the company they will own post-investment, directly impacting founder dilution.
Watch for. A valuation that is stated as 'pre-money' but is actually 'post-money' on closer reading, or a structure where the investment is tranched based on future milestones, creating uncertainty.
Why it matters. This dictates the order and amount of payout to investors upon a sale or winding up of the company, before any proceeds are distributed to founders.
Watch for. A high multiple (more than 1x) of the invested capital, or a 'participating' preference that allows the investor to receive their preference amount and then also share in the remaining proceeds with other shareholders.
Why it matters. This protects the investor's ownership percentage if the company later issues shares at a lower price, by adjusting the investor's original purchase price or share count.
Watch for. A 'full ratchet' mechanism, which can severely dilute founders by repricing the investor's entire holding to the new, lower price, as opposed to a 'broad-based weighted average' method.
Why it matters. This clause sets out who gets a seat on the board of directors and establishes which key company decisions require the investor director's affirmative vote.
Watch for. An extensive list of 'reserved matters' that gives the investor veto power over routine operational and business decisions, effectively transferring management control.
Why it matters. This ties the founders' shares to their continued association with the company over a period and restricts their ability to sell their shares.
Watch for. A vesting schedule that does not give credit for time already served, or a 'good leaver / bad leaver' clause that allows the company to buy back a departing founder's shares at a nominal value.
Why it matters. This prevents the company from soliciting or entertaining investment offers from other parties for a defined period, giving the investor a negotiation monopoly.
Watch for. An unreasonably long exclusivity period with no obligation on the investor to close the deal quickly, which can paralyse the company's fundraising efforts.
Generally, a term sheet is not a binding contract except for specific clauses like exclusivity, confidentiality, and costs, which are explicitly stated to be binding. The commercial terms are a non-binding statement of intent, but they carry significant moral weight and set the stage for the definitive agreements.
A pre-money valuation is the company's worth before the new investment comes in, while a post-money valuation is its worth after adding the investment amount. The distinction is critical because it determines the actual ownership percentage the investor receives for their capital, and a misunderstanding can lead to unexpected founder dilution.
An advocate can upload the term sheet, and the tool will detect the document type and parties. It then checks each clause against central Indian Acts and assesses the balance, flagging which party a clause favours and what to ask for. The output is a plain-English summary and a full report with findings, which serves as a starting point for the advocate's own detailed analysis and advice.
Free trial · Assistive review, not legal advice — every finding is a starting point for an advocate.