The term sheet: what it contains and why it matters

Before the definitive contract, in almost every investment or acquisition comes the term sheet: a concise document that puts the key terms of the deal in black and white. It is short — often just a few pages — but it decides the substance. Those who sign it lightly discover later that the terms that really mattered had already been settled there.

What it is and what it is for

The term sheet (sometimes called a “letter of intent” or “heads of terms”) captures the outline agreement between the parties before investing time and money in the full legal documentation. It serves three purposes:

To verify that the parties agree on the essential points before drafting expensive contracts.
To give the lawyers who will write the definitive agreements a blueprint.
To set the rules of the negotiation (exclusivity, confidentiality, timing).

It is not yet the contract: it is the map on which the contract will be built.

Binding or not? The distinction that counts

This is the first point to clarify. Generally the term sheet is largely non-binding: it captures an intention, not an obligation to close. But some clauses remain binding even if the deal falls through:

Confidentiality: the information exchanged is not to be disclosed.
Exclusivity (or “no-shop”): the seller commits not to negotiate with others for a defined period.
Cost allocation and governing law.

Reading which clauses bind and which do not is essential. Signing an exclusivity means taking other potential buyers off the table for weeks: it should be granted knowingly.

The economic terms

The heart of the document. This is where the following are defined:

Valuation: in investment deals a distinction is drawn between pre-money value (before the increase) and post-money value (after the new funds come in). The difference determines how much of the company the investor obtains.
Amount invested and the instrument used (capital increase, purchase of shares, convertible loan).
Resulting shareholding percentage and dilution of existing shareholders.
Price structure in acquisitions: the portion paid immediately, any deferred part or part tied to future results.

The governance and protection clauses

Beyond the numbers, the term sheet defines the rights that come with the investment. These are often more decisive than the price:

Voting rights and composition of the governing bodies.
Information rights and control over the accounts.
Liquidation preference: who is repaid first if the company is sold or liquidated.
Anti-dilution clauses, which protect the investor against future increases at lower values.
Pre-emption rights and co-sale (tag-along) and drag-along rights.
Founders’ vesting: shares vest over time, to tie those who lead the company to the project.

An investor may accept a generous valuation and then recover everything through these clauses. That is why the term sheet must be read as a whole, not item by item.

Conditions precedent and exclusivity

The document usually sets out the conditions to be met before closing: a positive outcome of the due diligence, any authorisations, approvals from the corporate bodies. And it defines the duration of the exclusivity during which the parties negotiate confidentially.

Mistakes to avoid

Focusing only on the valuation while ignoring the protection clauses.
Underestimating exclusivity, giving up alternatives with nothing in return.
Signing in haste because “it isn’t binding anyway”: some parts are, and the rest steers the whole negotiation regardless.
Leaving terms vague: what stays ambiguous in the term sheet becomes conflict in the contract.

In short

The term sheet sets the key terms before the definitive contract.
It is largely non-binding, but confidentiality and exclusivity usually do bind.
It defines valuation, amount, shareholding and the investor’s rights.
The governance and protection clauses weigh as much as the price.

How we help

We support you in negotiating and reading the term sheet from the right side of the table, clarifying what binds, what really costs and where the value is hidden. That way you reach the contract without surprises. Let’s talk about your deal.