Term Sheets in Investment Deals or Business Sales

Term sheets can also be called memoranda of understanding (MOU), heads of terms, or letters of intent (LOI). Each of these terms can be used interchangeably. Put simply, a term sheet is a document that sets out in writing, in summary form, the future commercial and legal relationship of the parties.

In this briefing, we explain the important role that term sheets can play in facilitating a meeting of minds on the key commercial terms with your counterparty and arriving at fully termed legal agreements as efficiently as possible from a time and cost perspective. We also highlight the key elements you should make sure you cover when negotiating your deal as well as the importance of involving your legal team at an early stage.

1.What is the purpose of a Term Sheet?

Not all deals require a term sheet but, as a rule of thumb, the more complex the set of commercial terms that have been agreed the better advised the parties will be to agree a term sheet. Save for a few exceptions, term sheets are generally not legally binding. Their main purpose is to capture, in writing, the commercial deal that the parties believe that they have agreed. This is important not only to assist the respective legal teams when they come to drafting the legally binding documentation but, more importantly, to avoid the parties finding out later that they had not actually agreed the deal that they thought they had. Additionally, it is much more difficult to reopen negotiations on issues that have been documented in a term sheet. Thus it is better that the difficult conversations are had at the term sheet stage rather than leaving them to later when both parties may seek to avoid losing face and significant expenditure has been incurred.

In summary, term sheets are also a useful tool to enable the parties to focus on the key commercial issues of their deal at an early stage and iron out any misconceptions. Whilst they can take time and do cost, a properly drafted term sheet will ultimately save both time and cost thereby enabling the parties to reach fully termed legal agreements quickly and efficiently.

2.Are All Term Sheets the Same?

Whilst there are some similarities between all term sheets, even term sheets documenting the same type of deal will not look the same. For example, not all VC investment term sheets will look the same. There is not one term sheet that will fit every genre of transaction; they are bespoke to reflect the agreement reached in relation to each transaction. However, there are some common features:

  • Identity of the parties (including third parties who are to benefit from, or be involved in, the transaction);
  • A description of the key commercial terms of the transaction including any financials or economics;
  • Timetable to reach fully termed transaction agreements;
  • A list of the key transaction documents;
  • Details of who will bear the costs of negotiating and drafting both the term sheet and the transaction documents;
  • Confidentiality provisions;
  • Termination or expiry date for the term sheet; and
  • Governing law and the forum for hearing disputes.

Other terms that might be covered include:

  • Due diligence provisions;
  • Conditions to completion of the transaction (for example, consents, filings, registrations, clearances, etc);
  • Exclusivity periods; and
  • Non-competes and non-solicitation.

Term Sheets can very in length from 1 page to 10+ pages. The length will be determined largely by the complexity of the transaction but also how much detail the parties go into in describing their commercial arrangements. It is important to strike a balance between setting out enough detail that everyone is clear what the terms of the deal are but not so detailed that the parties are effectively drafting nearly fully termed agreements.

3.What Additional Terms Should I Include for Business Sales and Business Investments?

Term sheets need to reflect the deal struck by the parties and so, because no two deals are the same, no two term sheets are the same. However, there are some additional areas which should normally be considered. They are as follows:

Term Sheets in Business Sales:

  • The purchase price which can consist of cash on closing or a share for share exchange or some form of deferred consideration consisting of cash, earn-outs, share for share exchange. If there are to be post-closing adjustments to the purchase price these should be noted in the term sheet;
  • Whether the sale is a sale of the assets of the target company (in which case the assets being sold should be identified) or of the shares in the target company (in which case the number and class of shares should be specified as well as a note as to whether it is a sale of the whole of the issued share capital or a smaller percentage);
  • Representations and warranties to be given by the seller(s) about the business;
  • Indemnities for certain matters that the buyer is particularly concerned about from a risk perspective;
  • Caps on the seller’s liability for breaches of representations and warranties as well as the minimum amounts for claims to be payable (de minimus and baskets);
  • Time period during which claims can be made against the seller(s);
  • Restrictions on what the seller can do with the business in the period between signing and closing; and
  • If the buyer will not own (post sale) all the issued share capital of the company, a shareholders’ agreement will need to be agreed (to the extent that one is not already in place) or the existing one may need amending. The main terms of the shareholders’ agreement or the changes to be made to the existing one should be noted.

Term Sheets in Business Investments:

The term sheet contents will depend on the investment size (seed, Series A, B or C) and type of investor (angel, EIS fund, venture capital trust, limited partner backed venture capital, family office or corporate venture capital):

  • Amount of funding and the valuation (pre- and post-money);
  • Equity percentage the investor will receive;
  • The class of shares (ordinary or preference shares) and the rights attaching to those shares;
  • Liquidation preference setting out the order proceeds are paid in the event of a liquidity event (such as a sale or winding up) including whether the preference is non-participating or participating (together with the participating cap) and exit waterfall;
  • Anti-dilution protection for the investor in the event of a down round;
  • Board representation to be granted to the investor and restrictions on board composition going forward such as a limit on the number of directors and the proportion that must be investor appointed;
  • What information must be provided to investors and the frequency;
  • What actions the directors can only take if they have the consent of investors;
  • Representations and warranties to be given by the existing shareholders/founders and/or the company about the business in order to ensure that the investors are receiving the value they believe they are receiving in return for their investment;
  • What share options for employees the company can grant post-investment including the size of the share option pool;
  • Dividend policy such as whether surplus profits must be distributed or reinvested in the business;
  • Founder vesting provisions (i.e. a process by which founder shares are earned back post-investment over a defined period of time) and what happens if a founder wishes to exit the company;
  • Employee leaver terms (so called ‘good leaver’/‘bad leaver’) to specify what happens an employee’s equity if they leave the company; and
  • Drag along and tag along rights as well as co-sale rights and pre-emption rights all of which serve to protect the investors who will all generally be minority shareholders.

4.Are term sheets legally binding?

Generally term sheets are stated to be not legally binding; it is important that this is clearly expressed on the face of the document so that it cannot be argued that the parties are legally committed to doing the deal, i.e. that they are able to walk away from the deal up to the point that fully termed legally binding contracts are signed. However, it is usual for some terms of the term sheet to be stated to be legally binding. These would include those terms dealing with confidentiality, exclusivity and costs.

5.Do I need to involve my legal team?

It is advisable for the legal teams of both parties to be involved in drafting the term sheet; at the very least the legal teams should review the term sheet before it is signed. Some of the key reasons involving your legal team in the early drafting of the term sheet are as follows:

  • The legal team can ensure that the term sheet is not legally binding except for those terms it is advisable to make binding (see above).
  • The term sheet is the starting point for drafting fully termed agreements so it is important that the term sheet covers all the key aspects of the transaction. Whilst the term sheet is not, as set out above, legally binding (except for certain specific elements),
  • it tends to be viewed as morally binding on the parties. The legal team can help to identify any elements of the transaction that the term sheet should cover but have been inadvertently omitted.
  • The term sheet is a summary of the transaction but it is imperative that the language used is unambiguous. This is because the term sheet will be used to document the fully termed legally binding agreements; if there is ambiguity in the term sheet this can lead to disagreements later on in the process. This in turn can have a negative impact on the relationship between the parties and lead to increased cost.


Term sheets are an extremely valuable tool in enabling parties to ensure that they have each understood what the other party expects to get out of the transaction at an early stage before the time, effort and expense of fully documenting the deal gets underway. This enables their relationship to start and continue on the right foot. The legal team play an important role in the term sheet process ensuring that key aspects of the deal are covered in the term sheet and in an unambiguous way. Experience shows that clients that involve their legal team in negotiation of their term sheets find they can move more quickly to commercial agreement with their counterparty. This leads to fully termed legal agreements being ready for execution more quickly saving not only cost later in the process but crucially the time of the commercial team enabling them to focus on driving their businesses forward.

Garfield Smith Solicitors have extensive experience of drafting and negotiating term sheets. Please feel free to contact us so we can discuss your needs.

29 September 2023


  • Garfield Smith
    Garfield Smith Senior Solicitor
    Managing Director
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  • Amanda Sermon
    Amanda Sermon Senior Solicitor
    Head of Corporate Finance
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