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Understanding Term Sheet: What Every Founder & Investor Should Know

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Understanding TERM SHEET

🔍 What Every Founder & Investor Should Know

What is a Term Sheet?

A term sheet lays out the key terms of an investment deal.

  • It is a non-binding document
  • Acts as a base for legal agreements (like share purchase/subscription agreements)
  • Usually prepared by investment bankers or deal advisors

What's Inside a Term Sheet?

Here's what you'll usually find:

  • Valuation (Pre/Post Money)
  • Investment amount & equity %
  • Voting & Board rights
  • Liquidation Preference
  • Anti-dilution protection
  • Exit clauses (drag-along, etc.)

❌ No!

A Term Sheet is a non-binding document, which means:

  • It does NOT legally force either party to complete the deal.
  • It just sets mutual expectations and key terms.
  • After this, detailed legal agreements like Share Purchase Agreement (SPA) are drafted.

👉 Think of it as a handshake deal before the real contract.

Pre-money vs Post-money Valuation

Pre-money:

Company's value before investment

Post-money:

Pre-money + new investment

Example:

Pre = ₹10 Cr, Investment = ₹2 Cr Post = ₹12 Cr → Investor gets 16.67% equity

👉 Clear valuation helps decide ownership & dilution**.**

Convertible Note – When is it Used?

Used when valuation is hard to decide early (like in seed rounds)

Investor puts in money now

Converts to equity later (at future valuation)

Includes:

  • Valuation Cap – max company value for conversion
  • Discount Rate – % off future price

💡 Practical for early-stage startups!

Liquidation Preference

💥What If your company gets sold or shuts down?

📌 Who gets paid first?

Term sheet defines whether investor recovers money before founders/employees. Investor gets back their money first

👉 Usually 1x liquidation preference is standard.

Protects investor from risky outcomes

Anti-Dilution Clause

What if next round is at a lower valuation?

This clause protects investors from losing value in "down rounds".

Types:

  1. Full Ratchet
  2. Weighted Average

Method used to maintain investor's share value over time

Pro-Rata Rights — And Why You Should Care!

  • Pro-Rata Rights allow existing investors to invest in future funding rounds
  • This helps them maintain their % ownership as company grows

Why does it matter?

  • High-growth startups dilute early investors
  • Pro-rata gives them a seat at the table in future rounds

Founder Tip:

Don't ignore this clause thinking it's "just investor- friendly" —

It reflects long-term interest and can actually help you build stronger investor relationships.

Term Sheet is where founder dreams meet investor money

💬 Learn it well. Negotiate wisely.

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