As a founder, having an investor is a coveted opportunity. At some point in your investor search, a term sheet may be used. Although a term sheet is a big step in getting funded, the term sheet itself may not be the final document of agreement.

While a term sheet is not legally binding, there are specific terms in the sheet that can be binding. There is also a certain language that’s used in term sheets that can be legally binding. Confidentiality terms, exclusivity, and closing expenses are examples of legally binding components of a term sheet. Situations like this are just some of the Legal Problems of Entrepreneurs and Startups that can happen, so it is best to educate yourself on the matters at hand.

Term sheets are an essential part of investment agreements and the funding process for companies. Care should be taken when reviewing and negotiating the terms in a terms sheet as it will determine the crucial benefits of your final agreement. If you’re interested in the legalities involved with a term sheet, this article is for you. Keep reading for more information on whether or not a term sheet can be legally binding.

How Can a Term Sheet be Legally Binding?

Although a term sheet is not generally considered to be legally binding, there are certain conditions in the term sheet that may be legally binding once signed. An investor may choose to use binding terms for the duration of time once the term sheet is signed.

Some examples of binding terms in a terms sheet may be related to:

  • Exclusivity
  • Confidentiality
  • Closing costs
  • Negotiation terms
  • Use of binding language


An example of binding terms included on a term sheet can be found at The Corporate Finance Institute. In this example, a binding section is included in the term sheet, preventing the founder from seeking other investors for a specified period.

This exclusivity term can also require that the founder alert the investor of any third party or investors that may be interested in providing funding. The exclusivity term can last up to three months.

The Startup Law Blog explains the period of exclusivity that may be included as a binding term in the terms sheet, which would prevent the founder from seeking other investors for a specified period.

Founders usually have more than one investor of interest. Founders have the opportunity to continue searching for other investors and will do so to get the best deal possible.

At the time of the terms sheet, if there is an exclusivity term, and both parties sign, the founder is prohibited from seeking other investors. Legal action could be taken if the founder seeks other investors while the exclusivity term is present.

Following the legal action, the founder may also be required to pay damages to the potential investor for the breach.


Confidentiality agreements are widely used in business. Startup Law Blog provides a brief explanation about why a confidentiality term may be necessary for the terms sheet. At least one party may want to keep the investment or purchase quiet until the deal is finalized.

The specific terms of the potential investment may also be kept confidential. The market can be fickle to certain news. Stock prices are sensitive, and even branding strategies and techniques have to be determined to allow proper press release once the deal is finalized. Confidentiality may also be in place to prevent fallout from a potential failure from closing the deal.


Lexology highlights the cost factor in binding terms of term sheets. The term sheet can make binding the parties responsible for closing costs such as legal fees. If costs are discussed in the terms sheet, they can be designated as binding and will be binding once the terms sheet is signed.

These costs may include administrative and legal fees and are usually paid for by the founder of the company receiving the investment. Founders should pay special attention to the cost and expenses terms.

These terms are typically binding and can be enforced to cover the legal fees of the investor if the deal is not finalized.

Negotiation Required

Some terms sheets may have a requirement that negotiations be conducted in good faith. This requirement is in place so that either party does not walk away without attempting to negotiate the final agreement.

This negotiation agreement protects both the founder and investor. Both the founder and seller are encouraged to negotiate under this term and can be held to pay damages if one party withdraws from the negotiations.

Binding Language

The specific language used in the terms sheet can make the terms sheet binding. The Startup Law Blog suggests some language that may make the terms sheet appear binding:

  • “All warranties, representations, covenants, and agreements, including indemnities and releases hereunder, made by Seller and Buyer shall be deemed and construed to be continuing warranties, representations, covenants and agreements which shall survive the Closing.”
  • Using the word buyer instead of “prospective buyer.”
  • Using the words “will” or “shall.”
  • It is adding statements that suggest specific requirements before closing.

Although terms sheets are not considered binding, the use of these terms, along with some binding language, may provide enough evidence of a legal agreement and lead to the payment of damages if these terms are broken.

A Non-Binding Terms Sheet that Became Binding

In a case noted by Aaron Hall, a terms sheet that was considered non-binding became binding and resulted in a legal battle based on the breakdown in negotiations.

The case cited was that of SIGA Technologies v. PharmaAthene, Inc. Although the general terms sheet was non-binding, the one-term included in the terms sheet required negotiating in good faith. Once this term was broken, legal action was taken.

PharmaAthene, Inc. provided a term sheet to SIGA Technologies. SIGA Technologies decided not to move forward to the final agreement and sourced funding from another investor.

PharmaAthene tried to negotiate with SIGA, and when negotiations failed, SIGA Technologies was sued and paid damages to PharmaAthene. More information on the SIGA Technologies v. PharmaAthene case can be found at Mintz.

There have also been other cases where a term in the terms sheet was considered binding and damages ordered to be paid. The wording used in the terms sheet can be regarded as binding in some cases.

Please ensure that a lawyer is involved at each stage of your terms negotiation and signing. Having a lawyer present will be beneficial to both the founder and the investor as there will be more clarity.

What Makes a Terms Sheet Non-Binding?

Terms sheets are generally not considered binding. When the term sheet is drafted, the language in the sheet can expressly state that the term sheet is non-binding.

The language can also explicitly state the terms in the agreement that is binding. Once you receive a terms sheet, you will need to look at it carefully to see if the term “non-binding” appears on the sheet.

Even if the term “non-binding” doesn’t appear on the sheet, the general term sheet is widely considered to be a proposal rather than an agreement to invest.

Understanding the terms sheet and having an attorney present is essential to determine what language in the terms sheet is binding and what language specifically makes the terms non-binding.

When is the Deal Finalized?

Since the terms sheet does not legally promise that an investment will be made, other legal and binding agreements will need to be drafted. The process to get to the drafting of legal contracts can be made based on the negotiated and terms agreed on in the signed terms sheet.

The approach to the final and binding agreement includes negotiating and signing the terms sheet, conducting due diligence, having legal counsel draft the final documents, and having a closing where all parties sign.

Negotiating the Terms Sheet

When you have multiple investors interested in your company, it provides insight into the market conditions and allows you to weigh your options. Knowing what each investor is willing to offer and the terms the investor may require will enable you to understand how far you can go with your negotiations to maintain interest and ensure you are getting the best deal.

Be sure to look for the exclusivity term in the terms sheet to ensure that you are not bound to only dealing with one investor, as going against this term could cause legal implications.

If you don’t already know the value of your company, you will need to have it evaluated. Valuing your company gives you an idea of the number of shares you can bargain with and provides you with the knowledge you will need to negotiate.

Before entering a terms sheet negotiation, it is advised that you find a lawyer to review the standard details of the terms sheet and have the lawyer present during the talks to understand if there are any binding terms in the terms sheet before signing.

While you may have a lawyer present, ensure that you have a good scope of what you are willing to negotiate.

All terms sheets are different; however, some Items negotiated in a terms sheet may include:

  • Investment amount
  • Share prices
  • Valuation
  • Voting and registration rights
  • Role of the founder
  • Closing requirements
  • Fees and expenses
  • How the agreement can be terminated

What Happens After Signing a Terms Sheet

The deal isn’t complete after the terms sheet is signed. After the negotiations and signing of the terms sheet, the investor will conduct due diligence, and the lawyers will begin to draft the final legal documents.

Due Diligence

The investor will also conduct due diligence and background checks to ensure there is or has not been any behavior of fraud or other business-related crimes.

This due diligence check will include a review of the history of the company, any legal disputes the company may have been involved in, and the finances of the company. Although the investor conducts the due diligence checks, the founder can also conduct due diligence checks on the investor.

In some instances, there may be delays in the closing of the deal. These delays can happen if any damaging information is discovered at the time of the due diligence investigation.

Drafting of Final Documents

After a term sheet is signed and due diligence is completed, there usually is legal drafting of final agreements. At this time, most documents will be handled by the founder and the investor’s lawyers.

The final legal documents may require additional negotiations on specific details of the final agreement. If these negotiations go well, the signing process can begin.

Some documents that may be drafted during this stage include the restating of the incorporation. This restating of incorporation would add the investor to the company records and document the change in control and rights.

A stock purchase agreement may also be drafted to confirm the investment and the relationship between the founder and investor. Other documents prepared may also include investors’ rights agreements and shareholder and board written consents. Once all documents are signed, and funds are transferred, the deal is finalized.

Purpose of a Term Sheet

A terms sheet outlines the provisions for investing in or purchasing a company. The terms sheet does not guarantee an investment; it does act as a proposal or intent to invest.

Terms are listed for negotiation and may include the amount of money that is proposed to be funded as well as the roles and responsibilities of the founder and investor. The provisions of the terms sheet are outlined and negotiated, and once the terms sheet is signed, it is later used to draft binding agreements.

Who Initiates a Terms Sheet?

A terms sheet is drafted and presented to a founder by an investor. The investor will express an interest in funding the business and will provide terms to be agreed on to move to the next stage of the relationship and investment.

After the term sheet is presented to the founder, there is a meeting to discuss the provisions listed in the term sheet. If all terms are agreed on, the term sheet is signed.

Duration of Term Sheets

The period between signing the term sheet to getting binding agreements drafted varies. During the negotiation process, a timeline may be created to determine when the binding agreements will be finalized.

Various conditions can delay the time between signing the terms sheet and reaching the final agreement. Delays to the final deal can occur due to the length of time legal counsel may take in drafting the final agreement.

Due diligence or background checks can also delay the final agreement. While some final agreements may be ready within a few weeks, others can take a month or more.


Benefits of Term Sheets

The terms sheet allows both the founder and the investors to bring all issues and concerns to be discussed before having a finalized agreement. Having a terms sheet means you are one step closer to having an investment in your company.

Conversations can happen from time to time with investors, and many verbal promises can be made. Having a terms sheet means that the final agreement to invest could be months away granted negotiations are successful.

Having a terms sheet not only outlines all the areas of the business transaction that needs attention, but it also allows for a common understanding between the investor and the founder. The terms sheet can qualify for a smooth process for the upcoming final agreement.

Have a terms sheet? That is great; you are closer than most companies ever get to having an investor. Carnegie Mellon University shows how many businesses out of 100 make it to each step of the investor review process.

  • The first step is the screening of the business plan. During this step, the business plan is submitted to the investor. Almost all companies can get to this stage in the process, as it only accounts for submitting the plan.
  • They are having the business plan reviewed by the investor. Only 20% of businesses will get to this level of having their business plan reviewed by the investor.
  • They have the investor invite the founder and management team to make a presentation. 15% of companies will have the opportunity to pitch to the investor.
  • The investor will only conduct initial due diligence on 10% of the companies that submit a business plan.
  • Only 6% of companies will be evaluated for a potential opportunity.
  • 5% of companies will be invited to a partner’s meeting.
  • Only 3% of companies will get the coveted terms sheet.

Even with a terms sheet issued, only 2% of companies will make it to the final and rigorous due diligence, and only 1% will proceed with legal documents and get funded.

Final Thoughts

If you are the holder of a terms sheet, it means you have made a significant impression on the investor. Although you have made a good impression on the investor, remember that your work has just begun.

The terms sheet does not mean that the deal has been closed. There will be much to negotiate and confirm. Remember that although the terms sheet is not considered a binding document, specific terms and languages used can be binding.

It is best to have a lawyer present during the negotiating and signing of the terms sheet to understand any legal implications.