What is a term sheet and what does it commit both parties to?

Full Explanation

Term sheets are typically non-binding LOIs (letters of intent) with the following exceptions: 1) exclusivity (binding — company can't shop the round), 2) confidentiality (binding — both parties protect sensitive info), 3) expense payment (binding — if deal fails, company may pay investor legal costs), 4) binding definitions of key terms (valuation, preferences, liquidation multiples). The binding sections are typically highlighted. Non-binding sections (governance, protective provisions, board composition) become binding only when articles of association are finalised. For founders, don't assume a term sheet is a done deal: it's 70% of the way there. Material issues can still derail closure: due diligence (background checks on founders, accounting review), cap table cleanup (resolving option disputes), legal documentation (articles of association, shareholder agreements). A typical timeline: term sheet signature → 30-45 days of due diligence and legal documentation → closing. During this period, founders should stay focused on operations (don't make key hires or pivot strategy based on the funding). If the deal dies, you need to have continued momentum.

Related Glossary Terms

Related Questions