So a potential buyer just slid an M&A term sheet across the table at you. Congratulations — and welcome to one of the more confusing documents you'll encounter as a founder. Before you sign anything, you need to understand which parts of that term sheet are actually binding, which parts aren't, and where the traps are hiding.
A quick note on terminology first. Whether the document is called a "term sheet," a "memorandum of understanding," or a "letter of intent," they all mean roughly the same thing. The differences are stylistic. We'll use "term sheet" throughout this article.
Why does a term sheet exist at all?
The buyer wants to buy your company. You want to sell. Great — but before either side spends real money on due diligence and definitive agreements, you both want to see the major deal points written down. That's what a term sheet does.
A good term sheet surfaces the deal-breakers early, builds momentum, and gives both sides something to point to when memories diverge a month from now. Some provisions in it will be binding. Most won't be. The whole thing might be labeled "non-binding and for discussion purposes only" — but as you'll see below, even a "non-binding" term sheet can come back to bite you.
Which provisions are typically binding (even in a "non-binding" term sheet)?
A handful of provisions are almost always carved out as binding, even when the rest of the document is explicitly not. Here are the ones to watch for.
Exclusivity period. The buyer will usually ask for a window — 30, 60, sometimes 90 days — during which you can't shop the deal to anyone else. This binds you. If you think the buyer might not have the financing to close, or you want to keep optionality alive, push back hard on the length of this period. Once you sign, your leverage drops.
Confidentiality. Almost always binding if included. A promise to keep the deal quiet is easy to break in practice, but having it in writing puts both sides on notice and creates at least a moral (and often legal) obligation. Worth having.
Fees and expenses. Typically each side pays its own legal, accounting, and banker fees pre-closing. This provision is usually binding. Read it carefully — some buyers try to flip costs onto the seller if the deal falls apart.
Conduct of the business. The buyer doesn't want you coasting between signing and closing. Expect language like "seller will conduct its business in the normal and ordinary course, consistent with prior practices." This binds you to keep running the company the way you have been. Don't sign a new five-year office lease the week after you sign a term sheet.
Bifurcate the binding from the non-binding
If your term sheet has a mix of binding and non-binding provisions — and most do — make sure the document is crystal clear about which is which. Either separate them into two sections, or include a clean statement at the top: "This term sheet is non-binding except for Sections X, Y, and Z."
Vague drafting here is how founders get into expensive arguments later.
What other provisions will show up in the term sheet?
Beyond the binding stuff, here's what else you should expect to negotiate.
Type of transaction. Is this a stock sale, an asset sale, or a merger? If it's an asset sale, exactly which assets are in and which are out? The term sheet should say. The tax and liability consequences of each structure are very different, and this is not a detail to leave fuzzy.
Price and payment terms. Price usually gets agreed in principle before the lawyers show up — but the payment terms often don't. Are you getting all cash at closing? Cash plus a seller note? Stock in the buyer? Is there a holdback or an escrow to back up your reps and warranties? How much of the purchase price is at risk, and for how long? Is there a basket (a minimum claim threshold) — and if so, is it a tipping basket (buyer recovers from dollar zero once the threshold is hit) or a true deductible? These details are where real money lives.
Outstanding stock options, warrants, and convertible notes. If you have any of these on your cap table, the term sheet should address how they're treated. Are options being cashed out, assumed, or accelerated? Are notes converting at the deal price or at their stated terms? Get this nailed down early — it directly affects what your common shareholders walk away with.
Key employees. The buyer will want to lock down the people who make the company work. That usually means employment agreements, retention bonuses, or new equity grants for key team members. If you, the founder, are a key employee — what are you signing up for? A two-year earn-out? A non-compete? Make sure you understand your own post-closing obligations before you agree to anyone else's.
Due diligence. Standard language: both sides agree to sign a mutual confidentiality agreement and share whatever reasonable documents and information the other needs to do a full investigation. Don't be surprised when the data room request is enormous.
Noncompetition. The buyer will almost certainly ask you not to compete after closing. If you're retiring to a beach, fine. If you want to start something else in an adjacent space, this is one of the most important provisions in the entire deal — negotiate geography, duration, and the definition of "competing business" carefully.
How detailed should the term sheet be?
It depends on which side of the table you're on. As a seller, you generally want more detail up front, not less. The buyer would often prefer to leave the harder issues — how long reps and warranties survive, how much you're on the hook for post-closing — to be negotiated later, when you're emotionally committed to the deal and have less leverage.
Don't fall for it. The items that matter most to you as a seller should be in the term sheet, not deferred to the definitive agreement.
Can a "non-binding" term sheet actually be binding?
Yes. And this is the trap.
A term sheet labeled "non-binding" can still be treated as enforceable by a court if (a) one side has partially performed in reliance on it, or (b) the document is so heavily negotiated and so detailed that it reads like a definitive agreement in everything but name. If you load up your term sheet with language like "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…" — you've started writing the definitive agreement. A court may decide that's exactly what you signed.
The rule of thumb: a term sheet should outline the deal, not draft it.
To keep the non-binding portions of your term sheet actually non-binding:
- Make it clear the parties contemplate a later, formal agreement
- Use language like "prospective buyer" rather than "buyer"
- Make closing subject to financing and satisfactory due diligence
- Avoid "will" and "shall" — favor "intends to" and "expects to"
- Don't agree to perform any obligations before closing — performance can give rise to a promissory estoppel claim
Bottom line
A term sheet looks like a formality. It isn't. The binding provisions inside it can lock you up for months, cost you money if the deal falls apart, and shape every conversation that follows. Read it carefully, push back on the parts you don't like before you sign, and don't let "it's just a term sheet" pressure you into signing something that's anything but.
This article was originally contributed to The Startup Law Blog by Teresa Daggett, whose draft provided the foundation for the version you just read. We've edited and rewritten it in our voice and updated it for the founders who read this blog — but the credit for getting us started here belongs to Teresa.
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