A term sheet is a short document prepared at an early stage of a transaction. It lists the main business and legal terms agreed between an investor and a company before entering into a major deal, such as buying shares.
In most cases, a term sheet is not legally binding. This means the parties usually cannot enforce it in court. However, some clauses may be binding if the document clearly states so.
A term sheet works like a roadmap for the deal. It helps both sides first agree on the key ideas and expectations. Based on this, detailed and final contracts are later drafted, such as the Share Subscription Agreement, Share Purchase Agreement, or Shareholders’ Agreement.
Simple Example (Indian Startup Case)
Imagine XYZ Ventures wants to invest ₹5 crore in ABC Tech and receive 20% ownership. For this, the investment is made through Compulsorily Convertible Preference Shares (CCPS).
The term sheet states that the company is valued at ₹20 crore before the investment. It also provides that the investor will get one seat on the board of directors. The invested money can be used only for product development and increasing sales. Further, the investor can exit after five years, either through an IPO or by selling the company to another buyer.
Binding parts (must be followed):
- Keep information secret (confidentiality).
- No talks with other investors for 60 days (exclusivity).
- Indian law applies, and disputes go to arbitration in Mumbai.
Non-binding parts (just ideas for now):
- Valuation details.
- How the investment works.
- Exit rights.
The deal only becomes fully legal after signing the final detailed agreements.
Why Use a Term Sheet?
- Records the Main Business Deal
It writes down key points like price per share, ownership percentage, and type of shares.
Example: Investor buys 25% shares at ₹100 each → this sets the base for later talks.
- Makes Talks Faster and Easier
Once big points are agreed, lawyers focus only on small details in final papers.
- Helps Plan Due Diligence
Lawyers check company records based on what the term sheet says.
Example: If the term sheet has an anti-dilution clause (protection if new shares lower value), they will check past share sales carefully.
- Shows How Risks and Control Are Shared
It lists investor protections like board seat, veto power on big decisions, or 1x liquidation preference (investor gets money back first if company sells).
This helps investors decide if the risk is okay.
- Shows Both Sides Are Serious
Signing the term sheet allows exclusivity, spending on experts, and full focus from the company team.
Indian Court View (Key Case Laws)
Indian courts look at the real intention of the parties, their words, and actions — not just the title of the document.
- Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. (2010)
The Supreme Court said even an early document (like emails) can create a binding deal if parties clearly intended it and agreed on main points.
Relevance: Courts check the language, behaviour, and whether key terms were settled — important for term sheets.
- Dresser Rand S.A. v. Bindal Agro Chem Ltd. (2006)
The Supreme Court ruled that a document called “Letter of Intent” (similar to term sheet) is not automatically binding just because of its name.
Key point: Real intention matters. Even a non-binding document can create duties if parties start acting on it.
Recent cases (like OYO v. Zostel in 2025) confirm that a term sheet clearly marked “non-binding” (except a few clauses) stays non-binding unless parties’ actions show they meant it to be a full contract.
International View
United States (especially Delaware – popular for VC deals)
Term sheets are very common and mostly non-binding.
Key Case: SIGA Technologies, Inc. v. PharmAthene, Inc. (Delaware Supreme Court, 2013 & later rulings).
Even a non-binding term sheet can create a duty to negotiate in good faith. If one side breaks this duty badly, they may have to pay big damages (even expected profits).
Lesson: Be careful — bad-faith talks can be costly.
United Kingdom
Courts focus on certainty and clear intention.
Key Case: Walford v. Miles (1992).
An agreement to negotiate without clear rules is usually not enforceable.
But clear clauses (like confidentiality or exclusivity) can be enforced separately.
Singapore
Courts respect clear drafting.
They often enforce only the parts clearly marked as binding in term sheets.
Quick Comparison Table
|
Aspect |
India |
USA (Delaware) |
UK |
|
Binding Nature |
Generally non-binding |
Generally non-binding |
Generally non-binding |
|
Court Focus |
Intention + parties’ conduct |
Good faith in negotiations |
Certainty of terms |
|
Common in VC/PE Deals |
Rapidly growing practice |
Highly standard practice |
Common in private equity deals |
|
Enforceable Parts |
Yes (e.g., exclusivity, NDA) |
Yes + possible good-faith duty |
Yes (if clearly drafted) |
Conclusion
A term sheet is very useful in share deals. It records the main understanding between the parties, helps save time, guides due diligence, and shows that both sides are serious about the transaction. It also provides a clear roadmap for drafting the final agreements.
Usually, most parts of a term sheet are non-binding, so parties can stay flexible until formal documents are signed. However, courts in India and other countries examine the real intention, language, and conduct of the parties. Therefore, careful drafting is essential, clearly stating which clauses are binding and which are not, to avoid future disputes or unexpected obligations.
