Term sheet

What it means

A term sheet summarises the key commercial terms of a transaction: valuation, investment amount, shareholding, investor rights, board composition, transfer restrictions, timetable. It fits on a few pages.

Most of it is non-binding; confidentiality, exclusivity and cost allocation usually are binding. Its purpose is to find out whether the parties agree on substance before the lawyers and auditors start billing.

It is not the title that separates a non-binding paper from a contract. If a term sheet contains all the essential terms of the future contract and the parties sign it without an express non-binding reservation, it may be treated as an agreement to conclude a future contract under the Commercial Code, which obliges them to actually sign the final one.

How it works in practice

The sequence is settled: an NDA, a term sheet or letter of intent, due diligence, the contract documentation, closing. The business plan and the financial model supporting the valuation are usually attached.

In a company sale this is where the later sources of dispute are agreed: holdbacks, escrow of part of the price, warranties and their caps, and how long the former owners stay tied in.

For the accounts what matters is how the term sheet describes the investor’s entry: whether the money goes into share capital, as a contribution outside it, or first as a convertible loan. The postings, the register filing and the tax treatment all follow from that, and we flag early if the chosen form does not match what the parties expect.

What to watch out for

Valuation wording must be made precise: pre-money and post-money differ by the entire investment. Non-binding is not absolute either - an exclusivity clause genuinely prevents talking to anyone else, even if the deal never completes.

The price in a term sheet is usually stated on a cash-free, debt-free basis with a normal level of working capital. If the adjustment mechanism is not agreed here, the seller learns at closing that the loan and any fall in stock and receivables will be deducted from the agreed sum, and ends up negotiating those numbers from a much weaker position.