Term Sheet
The non-binding document in which an AIF and an investee company set out the main terms of a proposed investment. Once signed, it leads to due diligence and then to the binding definitive agreements.
In plain language
An AIF does not go straight from liking a company to signing a share subscription agreement. First, the two sides write down the deal they have in mind: how much money, at roughly what valuation, and with what rights for the investor. That document is the term sheet.
The workbook calls it "an important milestone in the process of conducting an investment transaction by which the AIF invests in an investee company". It is not a legal agreement and is therefore not binding on both parties. It is the first step in reaching an understanding, and it paves the way for the binding investment agreements that come later.
A companion document, the Summary of Principal Terms (SOPT), sets out the main terms and conditions on which the AIF is willing to invest.
The terms are not final when the term sheet is signed. They can still be discussed and fine-tuned. A signed term sheet usually has a validity period within which both parties are expected to complete the transaction.
How it works
What goes into it (Chapter 10, section 10.1.4). The term sheet sets out:
- the proposed transaction and investment amount. Often a valuation range is given rather than a specific amount.
- the proposed capital structure after the investment
- board seat, key investor rights and management terms
- an exclusivity period
- conditions precedent to the investment, and other residual matters
Its job, in the workbook's words, is "to define the modalities avoiding vagueness and injecting precision into the transaction". It also builds commitment from both sides, because the deal is exclusive, so that the transaction can close quickly.
Where it sits in the process:
| Step | What happens |
|---|---|
| Preliminary Investment Memorandum (PIM) | Depending on the manager's internal protocols, a PIM may go to the Investment Committee to get authorisation to sign the term sheet |
| Term sheet executed | It has a validity period for completing the transaction and due diligence, usually extendable by mutual consent |
| Investor due diligence (10.2) | Due diligence does not commence unless the term sheet is executed by both parties. It covers business, commercial and technical, financial, and legal aspects |
| Final term sheet | Due diligence findings can lead to renegotiation. Valuation may be revised and representations and warranties strengthened. The final term sheet is executed again |
| Definitive agreements (10.3) | The final term sheet "becomes the basis for legal documentation". The binding agreements are the share subscription agreement and the shareholders' agreement |
The clauses that get argued over. Section 10.4.9 describes protective provisions in a term sheet. These give a class of preferred stockholders the right to approve important decisions, such as changing the size of the board or dissolving the company. Section 10.4.10 advises investors to be clear, while negotiating the term sheet clauses, about whether they will get a board seat.
A number to remember. Under the revised Angel Fund framework (SEBI circular dated September 10, 2025, section 14.9.4), Angel Funds must keep records of term sheets for each investment, including the list of investors who take part and how much each contributes.
A worked example
Illustrative company, fund and numbers. The sequence follows sections 10.1.4 to 10.3.
A Category II AIF has spent two months looking at Kovai Precision Components, a Coimbatore auto-parts maker. The Investment Committee approves a Preliminary Investment Memorandum, which authorises the team to sign a term sheet. The term sheet says:
| Term | As signed |
|---|---|
| Investment | Rs 60 crore, in compulsorily convertible preference shares |
| Pre-money valuation | A range of Rs 240 crore to Rs 270 crore |
| Board | One nominee director for the AIF |
| Investor rights | Protective provisions over new share classes, board size and dissolution |
| Exclusivity | 90 days |
| Conditions precedent | Clean financial and legal due diligence |
| Status | Non-binding, with a validity period extendable by mutual consent |
What the range means for the AIF's stake:
At Rs 240 crore pre-money 60 / (240 + 60) = 20.0%
At Rs 270 crore pre-money 60 / (270 + 60) = 18.2%
Only now does due diligence begin. The financial review finds Rs 15 crore of receivables from a customer that has stopped paying, which the information memorandum had not disclosed. The investment team revises its model, and the two sides renegotiate:
Revised pre-money valuation Rs 225 crore
Post-money 225 + 60 = Rs 285 crore
AIF stake 60 / 285 = 21.1%
Added protection stronger representations and warranties from the promoters
The parties sign the final term sheet, and it becomes the basis for the share subscription agreement and shareholders' agreement. Until those are signed, neither side has any contractual right to make the other close the deal.
Why NISM asks about it
Chapter 4, section 4.1.14 (Term Sheet and SOPT), introduces the term sheet as a non-binding milestone. Chapter 9, section 9.1.3.2 (Private equity deal structure), places term sheet negotiations after the non-binding LOI and before final due diligence. Chapter 10, section 10.1.4, covers the PIM, what the term sheet contains and its validity period. Section 10.2 makes due diligence wait for an executed term sheet, and sections 10.4.9 and 10.4.10 cover the clauses negotiated in it. A Chapter 10 sample question asks who enters into the term sheet. Section 10.1.4 describes the investment team giving it to the potential investee company. Expect questions on whether it is binding, what comes before and after it, and what it contains.
Common exam traps
- Non-binding. Sections 4.1.14 and 10.1.4 both say so, and 10.1.4 adds that it "does not provide for any contractual rights whatsoever". The binding documents are the definitive agreements that follow.
- The XIX-D workbook contradicts itself on the LOI. Section 9.1.3.2 lists the non-binding LOI and the term sheet as separate steps: the start-up signs the term sheet and SOPT only after accepting the LOI, and the term sheet "lays down the binding and non-binding clauses on both parties". Section 10.1.4 says the investment team presents "a non-binding Letter of Intent (LOI) also called the 'term sheet'", also sometimes called the SOPT, and that it is non-binding with no contractual rights at all. If a question describes the Chapter 9 deal pipeline, answer with separate steps. If it asks whether a term sheet creates contractual rights, answer with 10.1.4: it does not.
- Cross-workbook note (Series XIX-A). The XIX-A workbook, section 7.1.4, uses the same wording as XIX-D's 10.1.4: "a non-binding Letter of Intent (LOI) also called the 'term sheet'". That is the only place XIX-A mentions the LOI, so in XIX-A the two are simply one document. There is no separate LOI step like the one in XIX-D's Chapter 9.
- Due diligence comes after the term sheet. Section 10.2 says investor due diligence does not start until the term sheet is executed by both parties. Chapter 9's pipeline (9.1.3.2) puts an initial due diligence before the LOI and the final due diligence after the term sheet is signed.
- Signed twice. The first term sheet can be renegotiated after due diligence. The final term sheet is what the legal documents are based on.
- The PIM comes before the term sheet. It goes to the Investment Committee to get authorisation to sign the term sheet. Do not confuse it with the Final Investment Memorandum later in the deal pipeline.
- Often a valuation range, not a single figure. A fixed amount is not a defining feature of the term sheet.
Check yourself
1.The term sheet is entered into by:
- a)The manager with a potential investee company
- b)The sponsor with the investor
- c)The fund with the manager
- d)The distributor with the investor
Show the answer
Answer: (a) The manager with a potential investee company
The term sheet is presented by the investment team to the potential investee company. It is a non-binding Letter of Intent, also called the Summary of Principal Terms, setting out the proposed transaction, the investment amount (often a valuation range rather than a specified amount), the proposed post-acquisition capital structure, board seat, key investor rights and management terms, exclusivity period and conditions precedent.
Three facts to hold on to:
- It is non-binding on both parties and does not provide for any contractual rights whatsoever.
- It has a validity period, usually extendable by mutual consent.
- Despite being non-binding, it defines the modalities, avoiding vagueness and injecting precision, and establishes commitment from both sides through the exclusivity.
The fund and manager are bound by the Investment Management Agreement; the investor signs a Contribution Agreement. Neither is a term sheet.
2.The essential difference between an affirmative right and a veto right is that:
- a)An affirmative right applies only to shareholders holding above 26 per cent, while a veto right applies to all shareholders
- b)An affirmative right requires the investor's express consent even where an ordinary 51 per cent resolution would suffice; a veto right allows opposition to an action even if it has the requisite majority
- c)An affirmative right is exercisable only at general meetings, while a veto right is exercisable only at board meetings
- d)An affirmative right is statutory under the Companies Act, while a veto right is purely contractual
Show the answer
Answer: (b) An affirmative right requires the investor's express consent even where an ordinary 51 per cent resolution would suffice; a veto right allows opposition to an action even if it has the requisite majority
Affirmative rights are corporate actions that require the approval of the investors irrespective of the extent of their shareholding. Even if an action can be accomplished through an ordinary resolution (simple majority of 51 per cent), an affirmative right means the business cannot be carried through without such shareholder's express consent. They are positive control - the power to influence corporate actions - and they create an obligation on the promoters and company to seek prior approval before taking decisions on covered matters.
In contrast, a veto right is to oppose a corporate action even if it has the requisite majority. It is negative control, or the right of an investor to say no as a defence to protect his own interests.
Veto powers are insisted upon in some of the same corporate actions as an alternative to affirmative rights. The workbook gives a neat illustration of the overlap: the full ratchet clause can be used even through a veto power on further issuances of shares by the company, so as to protect dilution of the investor's equity in a down round.
Neither right depends on a shareholding threshold - that is the whole point of them - and both are contractual, negotiated in the term sheet.
3.Which of the following statements about Investor Due Diligence (IDD) of a potential investee company is correct, according to the workbook?
- a)Due diligence starts before the term sheet so that its findings can be built into the first draft of the term sheet
- b)Financial DDR is normally carried out by a law firm and covers only the latest audited year
- c)The complete DDR report is shared with the investee company for its sign-off before the investment
- d)Due diligence does not start unless both parties have executed the term sheet, and financial DDR usually covers at least the past three financial years
Show the answer
Answer: (d) Due diligence does not start unless both parties have executed the term sheet, and financial DDR usually covers at least the past three financial years
The workbook states: "The due diligence process DOES NOT COMMENCE UNLESS THE TERM SHEET IS EXECUTED by both parties." On financial DDR: "a financial DDR almost amounts to a financial review of the company and is usually carried out for the PAST THREE FINANCIAL YEARS AT LEAST."
Why the others are wrong:
- Before the term sheet — the order is the other way round. After IDD, findings "could lead to re-negotiations to modify and arrive at the FINAL term sheet", which then "becomes the basis for legal documentation."
- Law firm, latest year only — "The Financial DDR is usually carried out on behalf of the AIF's manager by an ACCOUNTING FIRM OR AN INVESTMENT BANK." Legal DDR is the one "normally conducted by a law firm." The period is at least three years, not one.
- Full report shared with the company — "A copy of the DDR report is generally NOT made available to the company. However, where necessary, an extract of such report may be sent to the company for suitable clarifications."
The DDR has three components: (a) Business, Commercial and Technical DDR, (b) Financial DDR and (c) Legal DDR. The business and technical DDR is normally done by the investment team itself.
Where this is taught
Free preparation for NISM Series XIX-ERelated terms
- Definitive AgreementsThe binding agreements signed between an investee company and the investment manager representing the AIF to complete an investment — chiefly the share subscription agreement and the shareholders' agreement.
- Preliminary Investment MemorandumA memorandum a fund's investment team may present to its Investment Committee, detailing a proposed investment and deal structure, to get authorisation to sign the term sheet.
- Share Subscription AgreementThe main definitive agreement between an AIF and an investee company for a fresh issue of shares — setting the terms of the investment and the AIF's rights beyond an ordinary shareholder's.
- Shareholders' AgreementAn inter se agreement between an AIF and all existing shareholders of the investee company, binding them to the rights and obligations of the deal — made enforceable by amending the articles.
- Investor Due DiligenceThe investigation an investor runs on an AIF and its manager before committing capital — the process of investigation and evaluation into the details of a potential investment.
- Protective provisionsTerm-sheet rights letting a class of preferred shareholders — usually minority or preference investors — approve key company decisions such as new share classes, board size, dividends or dissolution.
- Final Investment MemorandumThe memorandum a PE fund's deal team prepares once the investment committee gives final approval, proposing a specific valuation — which the start-up can still negotiate before final agreements are signed.
- Non-binding Letter of IntentThe document a private equity fund gives a target after initial due diligence, proposing an investment amount, a valuation and a stake — none of which it is yet obliged to honour.
- Right of First RefusalA shareholder right to match the best outside quote a selling shareholder has obtained — the holder sees the price first and may buy at it, or refuse and let the sale proceed.
- Capitalization TableThe record of who owns how much of a company — every class of shares, each investor's stake and the employee option pool. An AIF's name goes on it when the shares are allotted.
- Full RatchetThe harshest anti-dilution formula: after a down round, the earlier investor's preference shares convert at the lowest price the company has issued at, as though it had invested at that price all along.
- Option poolThe block of shares a company sets aside for employee stock options — its size matters to an investor because every option exercised dilutes the investor's stake.