Term Sheet- Capital Raise

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Term Sheet- Capital Raise

April 22, 2020

Term Sheet- Capital Raise
Term Sheet- Capital Raise


A term sheet is an intention to complete a transaction. It is a non-binding document that lays down the basic terms and conditions of the proposed investment. It is usually entered into between parties before they enter into a definitive agreement which would govern the terms of their investment. The parties should ensure a thorough negotiation of the term sheet, after which a binding agreement between the parties shall be drawn-up. A term sheet does not mention in detail, the entire clause to be incorporated in the definitive agreement but provides a broad overview of the clauses to be incorporated in the definitive agreement.


1. Size of Investment and Valuation of a company:

One of the most vital clauses in a term sheet is the investment size i.e. the investment amount being invested by the prospective investor in the company. The size of investment differs purely based on the nature of the transaction, risk appetite of the investor and ticket size of funding decided by a company. The pre and post-money valuation of the company are also mentioned in the term sheet. Pre-money valuation is the valuation of the company prior to the receipt of the funds by the company from the investor and post-money valuation is the valuation of the company post the receipt of the investment amount from the investor.

2. Type of instrument:

Considering that in the corporate structure, preference shareholders have a preferential right over the equity shareholders, the investors usually resort to investing through convertible instruments which are convertible into equity shares of a company.

3. Conditions Precedent:

The parties shall lay down the basic conditions precedents to be fulfilled prior to the receipt of the investment amount. Once the term sheet is signed and the diligence is initiated by an investor then the investor would get an idea of the compliance levels of a company and accordingly the conditions precedent shall be laid out in the definitive agreement. However, if the transaction is such which requires prior approval from any regulator then the same may be put at the term sheet stage.

Following basic clauses, depending on the commercial understanding of the parties and the series of funding, are usually agreed between the parties in the term sheet at a broad level and the procedural aspects of the same are covered in the definitive agreement:

4. Right of First Refusal:

The right of first refusal provides the shareholders, not selling their shares a right to accept or refuse the offer made by the selling shareholder before the shares have been sold to a third party. This clause plays a vital role, as the shareholders who are not selling their shares can have the right to control the process of a new investor coming in. This clause also ensures the preservation of liquidity of the selling shareholders. Therefore, the parties shall thoroughly look into the negotiation of this clause at the stage of working on a term sheet.

5. Anti-Dilution:

Dilution means a fall in the shareholding percentage, as there is more number of shares being issued by the company i.e. when there is an increase in the outstanding shares of the company. Anti-Dilution clause is incorporated in term sheets to protect the existing investors, in the event of the next round of funds raised by the company. When next round of investment is received and the shares are issued to the new investors at a price lower than that of the price at which shares were issued to the existing investors, these rights kick in. Therefore, this clause provides protection from the dilution of the share value held by the existing investors. Through this clause, an existing investor is protected during a down ground and his price of entry is protected.

6. Liquidation Preference:

This clause ensures an economic return to the shareholders upon the occurrence of a liquidity event in the company and lays down the waterfall mechanism of payment to a different class of shareholders of the company. This should be discussed in detail by the parties while negotiating a term sheet. This clause plays a vital role in the protection from any downside risk to the investors as this clause ensures that the investors are paid off well before the common shareholders and promoters of the company and receive their investment amount back. In India, the most common clause of liquidation preference is the return which is higher of the subscription amount and amount payable based on pro-rata shareholding in the company. It should be ensured from a promoter’s perspective that the investors do not get a ‘double-dip’ in the liquidity amount prior to their taking out of money from the company upon occurrence of a liquidity event.

7. Drag Along:

A drag-along right prevents a situation wherein a minority shareholder hinders the sale of the company, which has been approved by the majority shareholders of the company, which means that a minority shareholder is dragged along with the majority shareholders in the event of a sale. This clause shall be negotiated properly as it would have implications on the promoter of the company.

8. Tag-Along:

A tag-along clause gives a minority shareholder the right but not an obligation to join in during the sale of the company by the majority shareholders. It plays a vital role when a company is being sold. It is considered as a strong right to the investor and provides an exit option to the investor with minimum rights in the company. It provides in protecting the interests of the minority shareholders from the favourable deals taken by the majority shareholders.

9. Reserved Matters:

This right is particularly important for minority shareholders of a company. This clause gives a right to them to control certain critical matters in a company and the same cannot be undertaken without their prior consent.

10. Exclusivity and Validity:

This clause is usually incorporated to safeguard the rights of the prospective investor for a certain period of time because once an investor has signed the term sheet and has initiated the diligence on the company, then for a certain period of time as agreed in the term sheet, the company should not be able to negotiate the terms with other investors. Further, from a company point of view also, this is an important clause as, if the investor does not sign a definitive agreement within the agreed time period then the company can go ahead and sign the term sheet with other investors.


It is advisable that the parties should thoroughly negotiate all the clauses to be incorporated in the definitive agreement at the time of preparation of a term sheet which helps in expedited closure of definitive agreements. Therefore, the aforesaid clauses shall be looked into and negotiated carefully by both the parties while working on the term sheet itself.

Authors: Anita Dugar, Senior Associate; Kriti Sanghi, Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) anitadugar@samistilegal.in (ii) kritisanghi@samistilegal.in.

Updated as on April 22, 2020

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