Term Sheet Template & Explanation

Term Sheet Template & Explanation

A term sheet is the most important document in any fundraising round. It outlines the key terms of the investment before the detailed legal agreements are drafted. This guide explains every major clause with founder-friendly benchmarks.

What is a Term Sheet?

A term sheet is a non-binding agreement that outlines the basic terms and conditions of an investment. It serves as the basis for drafting binding legal documents like the Shareholders Agreement (SHA) and Share Subscription Agreement (SSA).

Key Clauses Explained

#### 1. Valuation

Pre-money valuation: Company's value before the investment

Post-money valuation: Pre-money + investment amount

Example: INR 10 Cr pre-money + INR 2 Cr investment = INR 12 Cr post-money. Investor gets 16.67% equity.

Founder tip: Always negotiate on pre-money valuation. The higher it is, the less dilution you face.

#### 2. Investment Amount and Instrument

Equity shares (most common for priced rounds)

Convertible notes (common for pre-seed/seed)

SAFE notes (Simple Agreement for Future Equity)

CCDs (Compulsory Convertible Debentures, popular in India)

#### 3. Liquidation Preference

This determines who gets paid first during an exit or liquidation.

1x Non-participating preferred: Investor gets their money back first OR converts to common stock (whichever is higher). This is the most founder-friendly.

1x Participating preferred: Investor gets their money back first AND participates in remaining proceeds. Less favorable for founders.

2x or higher: Avoid if possible, as investor gets 2x their investment before anyone else.

Founder tip: Always push for 1x non-participating preferred.

#### 4. Anti-Dilution Protection

Protects investors if a future round happens at a lower valuation (down round).

Full ratchet: Investor's price is adjusted to the new lower price (very investor-friendly)

Broad-based weighted average: Price adjustment based on a weighted formula (standard and fair)

Founder tip: Accept broad-based weighted average, push back on full ratchet.

#### 5. Board Composition

Defines how many board seats each party gets.

Typical seed: 2 founder seats, 1 investor seat

Typical Series A: 2 founder seats, 1 investor seat, 1 independent

Typical Series B+: 2 founder, 2 investor, 1 independent

Founder tip: Always maintain board majority or at least equal representation in early stages.

#### 6. Vesting Schedule

Founder shares are typically subject to vesting to protect the company if a founder leaves.

Standard: 4-year vesting with 1-year cliff

Cliff: No shares vest for the first year. After cliff, shares vest monthly or quarterly.

Acceleration: Single or double trigger acceleration on acquisition.

#### 7. Right of First Refusal (ROFR)

Gives existing investors the right to participate in future funding rounds before new investors. This is standard and generally acceptable.

#### 8. Drag-Along Rights

Allows majority shareholders to force minority shareholders to join in the sale of the company. Standard clause but ensure the threshold is high enough (typically 75%+).

#### 9. Information Rights

Investors typically require:

Monthly or quarterly financial statements

Annual audited accounts

Board meeting minutes

Cap table updates

#### 10. No-Shop / Exclusivity Clause

Prevents the founder from negotiating with other investors for a specified period (typically 30-60 days).

Founder tip: Keep this period as short as possible (30 days is reasonable).

Template Structure

A basic term sheet should include these sections in order:

Parties involved

Type and amount of investment

Valuation (pre-money and post-money)

Liquidation preference

Anti-dilution provisions

Board composition

Voting rights

Protective provisions

Founder vesting

ROFR and co-sale rights

Information rights

Exclusivity period

Conditions precedent to closing

Governing law

Red Flags to Watch For

Participating preferred with more than 1x liquidation preference

Full ratchet anti-dilution

Investor veto on all operational decisions

Founder vesting restarting on new round

Unreasonably long exclusivity periods (90+ days)

Broad non-compete clauses