Term sheet explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An equity round is documented in stages, and each document has a different job. The term sheet records the commercial deal in outline; the share subscription agreement turns it into binding terms for the issue of new shares. Founders, finance heads, company secretaries and investors' advisers should know which document does what before anyone signs, and a shareholder agreement drafted alongside keeps them aligned.
The term sheet is a commercial document: mostly non-binding on price and structure, with a few clauses usually made binding as practice (confidentiality, exclusivity, costs). The share subscription agreement is the binding contract under which the investor pays and the company issues shares, after conditions are met. The issue itself must still follow the Companies Act, 2013; those steps are linked here, not restated. Everything on clauses below is practice, not a legal requirement.
The documents in order
A round usually runs through six documents. A confidentiality agreement comes first; see the NDA draft. The term sheet follows, then due diligence, then the share subscription agreement, then the shareholders' agreement, and finally the closing documents. For the legal side of the investor's due diligence, see the financial and legal due diligence service; for the charges that diligence will turn up, see our note on the search and status report.
Term sheet: what each clause does
| Clause | What it does | Usual status |
|---|---|---|
| Valuation and price per share | States the pre-money value and the price at which shares are issued | Non-binding |
| Instrument | Equity shares, preference shares or a convertible | Non-binding |
| Liquidation preference | Says who is paid first, and how much, on a sale or winding up | Non-binding |
| Anti-dilution | Adjusts the investor's holding if a later round is priced lower | Non-binding |
| Board seat | Right to appoint or nominate a director or observer | Non-binding |
| Reserved matters | Decisions needing the investor's consent | Non-binding |
| Exclusivity | The company will not shop the deal for a stated period | Usually binding |
| Confidentiality | Terms of the deal stay private | Usually binding |
| Costs | Who pays advisers | Usually binding |
Which clauses bind is a matter of how the term sheet is worded; the document should say so in terms. A founder should read each non-binding line as a promise to negotiate in good faith, because the later agreements will follow it closely.
Pre-money and post-money. Pre-money value is the value agreed for the company before the new money; post-money is that figure plus the amount invested. Price per share is the pre-money value divided by the number of shares in issue before the round (counted on the basis the term sheet states). How a valuation is supported is dealt with in our note on when the law requires a valuation report and on moving from enterprise value to a value per share.
Share subscription agreement: what it contains
- Subscription. The investor agrees to subscribe for a stated number of shares at the stated price, and the company agrees to issue them.
- Conditions precedent. Things that must happen before closing: board and member approvals, completion of diligence, clearances, delivery of documents, no adverse change.
- Representations and warranties. The company's statements on title, accounts, contracts, litigation and compliance. These are the investor's basis for relying on the numbers.
- Indemnity. What the company or promoters must make good if a statement proves wrong.
- Closing actions. Payment, issue and allotment, entries in the registers, and delivery of the share certificates or electronic credit, as the law and the agreement require.
- Covenants. Use of funds and interim conduct.
It differs from a share purchase agreement, under which existing holders sell shares and the company gets no money, and from the shareholders' agreement, which governs the relationship between shareholders afterwards. The three should be drafted so that they do not contradict one another.
The Companies Act steps that follow
Signing the agreement does not complete the issue. The company must follow the law on issuing shares to a person outside the existing members: see section 42 on private placement and the post on section 62 on further issue of shares for section 62(1)(c). Where the investor is a person resident outside India, pricing is covered in the post on rule 21 of the FEM (Non-debt Instruments) Rules, 2019. Tax valuation is a separate question; see our income-tax guides. For wider reading on funding stages, see angel investor funding.
Listed companies have further requirements under the securities regulations, which are not covered here.
Worked example (all figures assumed)
Lantern Foods Private Limited (assumed) has 10,00,000 equity shares, all held by its founders. An investor offers ₹5 crore at a pre-money value of ₹20 crore.
- Price per share = ₹20 crore divided by 10,00,000 shares = ₹200.
- Shares issued = ₹5 crore divided by ₹200 = 2,50,000 shares.
- Post-money value = ₹20 crore plus ₹5 crore = ₹25 crore.
- Total shares after the round = 10,00,000 plus 2,50,000 = 12,50,000.
- Investor's holding = 2,50,000 divided by 12,50,000 = 20 per cent.
- Founders' holding = 10,00,000 divided by 12,50,000 = 80 per cent, so founders are diluted by 20 percentage points.
Check: 20 per cent of ₹25 crore is ₹5 crore, which equals the amount invested. If the term sheet had set aside an option pool before the round, the share count used for the price would change, and so would the founders' percentage; the term sheet must say which basis applies.
Common lapses
- Leaving it unclear whether the pre-money share count includes an option pool.
- Treating the whole term sheet as non-binding, or the whole as binding, without saying which.
- Conditions precedent with no date or no party responsible.
- Warranties that the company cannot give truthfully, left in to close faster.
- Signing the subscription agreement before the shareholders' agreement is ready, then renegotiating.
Need help with the funding documents?
If you are raising or investing, our team can help read the term sheet, draft or review the subscription agreement and align the shareholders' agreement through our shareholder agreement service, so that the terms agreed in principle survive into the final papers.
Key takeaways
- The term sheet is commercial; the subscription agreement is the binding contract for the issue.
- Confidentiality, exclusivity and costs are usually the binding clauses of a term sheet; say so in terms.
- Price per share is pre-money value divided by the shares in issue on the basis stated.
- Conditions precedent need dates and owners.
- Company-law steps for the issue follow section 42 and section 62(1)(c); see the linked posts.
- Keep the subscription agreement, shareholders' agreement and articles consistent.
Read next
- Search and status report on the charges of a company
- Intellectual property audit for a company
- Specimen shareholders' agreement
- Share purchase agreement: key clauses
Disclaimer: Based on the Companies Act, 2013 (MCA consolidated text) and, for the Essential Commodities Act, 1955, the India Code text showing amendments up to Act 40 of 2021, as consulted on 6 October 2026. Later amendments, rules, notifications and control orders should be checked in their current form. Checklists, report outlines and examples are illustrative drafting by TaxClue with invented names and figures. This article is general information, not legal advice; check the official text before acting.