Term sheet: meaning, key terms and what is binding
A term sheet sets out the main terms of an investment before definitive agreements. Most terms are non-binding, except exclusivity and confidentiality.
Short answer
A term sheet is a short document that sets out the key commercial and legal terms on which an investor proposes to invest in a startup, before the definitive agreements are drafted. Most of its terms are non-binding, but clauses on confidentiality, exclusivity, costs and governing law are usually binding.
- Purpose
- Agree main terms before definitive documents
- Binding parts
- Usually confidentiality, exclusivity, costs, governing law
- Common instrument
- Compulsorily convertible preference shares (CCPS)
- Leads to
- Share subscription and shareholders' agreements
Key terms in a term sheet
Term sheets vary by stage and investor, but most cover the points below. Each has a direct effect on founders' ownership, control and payout at exit, so read them together rather than one at a time.
- Pre-money valuation and investment amount
- Instrument, often CCPS for Indian startups
- ESOP pool size and whether it is in the pre-money
- Liquidation preference, such as 1x non-participating
- Anti-dilution protection
- Board composition and reserved matters
- Founder vesting and lock-in
- Conditions precedent, including due diligence
- Exclusivity or no-shop period
After the term sheet
Once signed, the investor conducts due diligence on the company's legal, financial, tax and secretarial position. The parties then negotiate the share subscription agreement and shareholders' agreement, and the company passes board and shareholder resolutions, adopts restated articles and issues shares through a private placement. For foreign investors, pricing must comply with FEMA and the allotment is reported in Form FC-GPR.
Why it matters for startups
The term sheet sets expectations, and terms agreed here are difficult to reopen later. Focus beyond valuation on liquidation preference, ESOP pool placement, reserved matters and the exclusivity period. Take legal advice before signing, and make sure the company is ready for diligence so the closing is not delayed. Keep a record of what was agreed in the term sheet, because the definitive agreements are drafted against it.
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Sources
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is a term sheet legally binding?
Mostly not. The commercial terms are usually non-binding, but confidentiality, exclusivity, costs and governing law clauses are typically binding.
How long is a typical exclusivity period?
It varies, often several weeks to a few months, during which the company cannot negotiate with other investors.
Does signing a term sheet guarantee funding?
No. Funding depends on due diligence and definitive agreements, and investors can withdraw before closing.