How It Works
A term sheet is a generally non-binding agreement that captures the basic terms and conditions of an investment.
The term sheet serves as a template and basis for more detailed, legally binding documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is drawn up.
Contents of Term Sheet
The following clauses form part of a well drafted Term Sheet:-
Name of the company in which the investment is being made
Type of security to be issued
Conversation rate of convertible securities
Right of first refusal (ROFR)
Right of first offer (ROFO)
Reps & Warranties
Governing law an
d Dispute Resolution
Laws governing Term Sheet in India
The different laws which govern various aspects of Term Sheet in India are as follows:
- Companies Act, 2013 and various rules framed thereunder
- The Indian Contract Act, 1872
- Foreign Exchange Management Act, 1999
- Consolidated FDI Policy, 2020
- RBI Policies
- Competition Act, 2002
- SEBI Guidelines (in case of listed company)
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Frequently Asked Question
Who prepares and presents the Term Sheet?
Usually, it is the investor who presents the Term Sheet to the founders of the investee company.
Is Term Sheet always non-binding?
A Term Sheet is usually non-binding document by the very nature of it. With that being said, nothing stops the parties from entering into a binding Term Sheet.
In fact, a few clauses of the Term Sheet, such as governing law and dispute resolution, NDA, etc. are usually kept binding.
How is Term Sheet used?
A term sheet is an agreement that is executed between the prospective investor and the company.
It is usually entered into before the process of due diligence begins and it lays a foundation on which the more definitive documents, such as Share Subscription and Shareholder's Agreement are prepared at a later stage.
What happens after the parties have executed Term Sheet?
After the parties have executed the Term Sheet, the lenghty and crucial process of due diligence follows on the investee company, and afterwards, the parties enter into more definitive documents, such as Shareholder's Agreement, to give legal and binding effect to the investment.
Is it mandatory to enter into a Term Sheet?
No. It is not mandatory to enter into a Term Sheet.
However, most investors and founders prefer to enter into a Term Sheet that lays out the foundation of the major terms, upon which the definitive documents are later prepared.
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