What Is a Term Sheet? A Plain-English Guide for Founders, Investors and Business Owners

Term sheets are used for investments, loans, acquisitions and partnerships all over the world. Yet many first-time founders and business owners aren't sure what a term sheet should contain, whether it's binding, or what happens after it's signed. This guide answers those questions in plain English.

What is a term sheet used for?

A term sheet is a roadmap for the deal. It records the points the parties have agreed so that:

• both sides can check they're on the same page before going further;
• lawyers have a clear brief for drafting the final agreements;
• the parties can spot deal-breakers early, when walking away is still cheap.

You'll usually see a term sheet when:

• raising investment, for example a seed round, a SAFE or a convertible note;
• borrowing or lending money, especially between businesses or from private lenders;
• buying or selling a business, or some of its shares or assets;
• starting a partnership or joint project with another company.

Term sheet, heads of terms, letter of intent: what's the difference?

Mostly the name. Depending on the country and the type of deal, the same document may be called:

The title doesn't decide whether the document is binding. What matters is what the document actually says about its legal effect. We cover that in detail in Is a Term Sheet Legally Binding?.

What makes a document a term sheet?

Not everything in a term sheet is equally important. It helps to separate the essential terms, without which the document isn't really a term sheet at all, from the optional terms that are common but can be added, changed or left out.

The essential terms

Every term sheet should clearly cover:

1. The parties. Who is dealing with whom, using full legal names and registration details, not brand or trading names.
2. The proposed transaction. What the deal is, exactly what is being issued, sold, lent or provided, and how the deal will be structured, step by step.
3. Legal effect. Which parts of the term sheet are legally binding and which are not.
4. Expiry. How long the other side has to accept, and when the term sheet ends if the deal isn't signed.
5. Governing law and disputes. Which country's (or state's) law applies, and whether disputes go to court or arbitration.
6. General terms. Short boilerplate, such as confirming that people who aren't parties can't enforce it and that it can be signed electronically.

If any of these is missing or vague, the term sheet is likely to cause confusion rather than prevent it.

The optional terms

On top of the essentials, most term sheets include some of these:

• Key commercial terms: price or investment amount, valuation, payment terms, interest rate, board seats and similar.
• Conditions: things that must happen before the deal closes, such as due diligence or regulatory approval.
• Timetable: target dates for signing and completing.
• Exclusivity: a promise not to negotiate with anyone else for a set period.
• Confidentiality: keeping the deal and shared information private.
• Costs: who pays the legal fees.

These are important, but they're flexible. At an early stage you may not have agreed the price yet, and that's fine. A term sheet can still do its job with just the essentials.

For a clause-by-clause list, see our Term Sheet Checklist.

Is a term sheet legally binding?

Usually, most of it isn't. A well-drafted term sheet says clearly that the commercial terms (price, valuation, conditions and so on) are not binding, so either side can walk away if, for example, due diligence uncovers a problem.

A few protective terms are usually binding, typically:

• exclusivity;
• confidentiality;
• costs;
• expiry;
• governing law and disputes.

The key is that the term sheet says so expressly. If it's silent or unclear, a court may decide that more of it is binding than you intended. Our article Is a Term Sheet Legally Binding? explains how this works and the traps to avoid.

What happens after a term sheet is signed?

1. Due diligence. The investor, lender or buyer checks the business, its legal position and its finances.
2. Drafting the definitive agreements. Lawyers turn the term sheet into full legal documents, such as a subscription agreement, facility agreement or share purchase agreement.
3. Negotiation. Details are worked out. Some terms may change, especially if due diligence finds issues.
4. Signing and completion. The deal becomes final only when the definitive agreements are signed and any conditions are met.

Avoid the common mistakes

Even a two-page term sheet can go wrong: the wrong party named, a vague description of the deal, or a price that ends up binding by accident. We've collected the most common problems, and how to fix them, in 12 Common Term Sheet Mistakes (and How to Avoid Them).

Frequently asked questions