What is a term sheet — and is it legally binding?
By SuLe · Updated 26 June 2026
A term sheet is a short document recording the headline terms an investor proposes for your funding round — valuation, amount, share class and key rights — before lawyers draft the binding paperwork. In England and Wales it is mostly not legally binding: the commercial terms are agreed "subject to contract", but clauses on exclusivity, confidentiality and costs usually are binding.
Key facts
- A term sheet's commercial terms — valuation, amount, rights — are agreed "subject to contract" and are not binding.
- Exclusivity, confidentiality and costs clauses are usually expressly binding, and survive a collapsed deal.
- English law imposes no general duty to negotiate in good faith: Walford v Miles (House of Lords, 1992).
- The binding paperwork of a priced round is the subscription agreement, shareholders' agreement and new articles of association.
- New shares must be reported to Companies House on form SH01 within one month of allotment (Companies Act 2006).
What does a term sheet cover?
The whole deal, at low resolution: how much is invested, at what valuation, through what instrument, with what rights attached. It runs to a few pages; the final documents run far longer.
Economic terms cover the amount, the pre-money valuation, the option pool and any liquidation preference. Control terms cover board composition, investor consents, information rights, founder vesting and what happens when shares change hands.
A term sheet also sets the timetable and conditions — completed due diligence, say, or SEIS/EIS advance assurance from HMRC — and states which of its clauses are meant to bind. Everything else is a statement of intent.
Which parts of a term sheet are legally binding?
By default in England and Wales, very little. The commercial terms are agreed "subject to contract", a label that keeps them non-binding until the long-form documents are signed.
Three clauses are usually made expressly binding, and they matter. Exclusivity (the "no-shop") stops you courting other investors for a stated period; confidentiality protects what each side learns; and the costs clause fixes who pays whose legal fees — sometimes deal or no deal.
Read those three as carefully as the valuation. They are the only parts you can actually be held to.
| Term sheet clause | Binding? | What it means for you |
|---|---|---|
| Valuation, amount, share class | No — "subject to contract" | Either side can renegotiate or walk away |
| Investor rights (board, consents, preference) | No | The detail lands in the shareholders' agreement and articles |
| Exclusivity / no-shop | Usually expressly binding | You cannot court other investors for the stated period |
| Confidentiality | Usually expressly binding | Survives even if the deal collapses |
| Costs | Usually expressly binding | Who pays legal fees — check if it applies deal or no deal |
Can an investor walk away after a signed term sheet?
Yes. Until the subscription agreement is signed and the money has moved, an investor can withdraw from the commercial deal — and so can you.
English law is unusually blunt here: there is no general duty to negotiate in good faith, a rule the House of Lords laid down in Walford v Miles (1992). An agreement to agree is not a contract, however advanced the diligence or warm the emails.
Reputation, not law, restrains investors in practice — but keep other options warm until completion, within whatever exclusivity you signed.
Why negotiate hard on a document that isn't binding?
Because the term sheet decides the deal in practice, even though it doesn't bind in law. The long-form documents are drafted to match it, and reopening an agreed term later reads as bad faith and burns goodwill and fees.
Your leverage peaks just before signing: competing investors are still allowed and nothing is agreed. Once exclusivity starts, the market closes and momentum belongs to the investor.
So test the valuation against the option pool, the preference and the consent list before signature — a fixed-scope review here is cheap insurance against renegotiating long-form drafts.
What documents turn the term sheet into a binding deal?
For a priced equity round: a subscription (investment) agreement, a shareholders' agreement and new articles of association. Those three carry everything the term sheet sketched.
The subscription agreement binds the investor to pay and the company to issue shares, with warranties attached. The shareholders' agreement governs the ongoing relationship — consents, information, transfers — and the articles hard-code the share rights.
Raising on a convertible instead collapses the paperwork to a short ASA or loan note, with the valuation deferred. Either way, once new shares are allotted, form SH01 must reach Companies House within one month under the Companies Act 2006.
Worked example
Josh and Amina, founders of a healthtech marketplace, sign a term sheet for a £700,000 seed round at a £2.8m pre-money valuation. It grants 45 days' exclusivity, marking exclusivity, confidentiality and costs binding; everything else is subject to contract.
In week five the fund's investment committee declines. There is no claim for the lost round: the commercial terms never bound anyone, and English law imposed no duty to keep negotiating in good faith. The binding clauses work both ways, though — the fund stays bound by confidentiality, while the founders' £6,000 costs contribution was payable "deal or no deal", so that invoice still arrives. Their next term sheet caps exclusivity at 30 days and makes costs payable only on completion.
Where founders go wrong
Treating a signed term sheet as money in the bank
— nothing is committed until the subscription agreement is signed and funds arrive; don't start spending on the strength of it.Granting long exclusivity
— you are locked out of the market while the investor remains free to walk; negotiate the shortest period that lets diligence finish.Skimming the "non-binding" document for the valuation alone
— exclusivity, confidentiality and costs clauses bite even if the deal dies.Leaving the negotiation to the long-form stage
— the term sheet anchors everything that follows; changes after signature cost goodwill and legal fees.
Related questions
Can an investor back out after signing a term sheet?
Yes, on the commercial terms. A term sheet is agreed subject to contract, and English law imposes no general duty to negotiate in good faith (Walford v Miles, 1992). Until the subscription agreement is signed and funds arrive, either side can walk — only the binding clauses survive. [More: Can an investor back out after signing a term sheet?]
Is a term sheet the same as heads of terms or a letter of intent?
Functionally, yes. Heads of terms, letter of intent, memorandum of understanding and term sheet are different labels for the same thing: a short, mostly non-binding record of the deal's shape. Whatever the label, the same rule applies — check which clauses are stated to be binding.
What should a UK seed-stage term sheet include?
The economics — amount, valuation, option pool and liquidation preference — and the control terms: board composition, investor consent rights, founder vesting and share transfer rules. It should also state which clauses bind and reflect any SEIS/EIS requirements before the lawyers draft the full documents. [More: What should a UK seed-stage term sheet include?]
Is a professional term sheet review worth it?
Usually, yes — it is a small, fixed piece of work compared with drafting a full suite of round documents, and it happens at the point where you still have leverage. Once the term sheet is signed, renegotiating a bad term means reopening an agreed deal. [More: What is a term sheet review and is it worth it?]
A term sheet decides your round in practice — and the few clauses that do bind can cost you money even if the deal dies. A SuLe solicitor can review the terms and tell you what each becomes in the long-form documents. Book a free term sheet review before you sign anything.
Keep reading: What should a UK seed-stage term sheet include? · What is a subscription (investment) agreement? · What is a priced round vs a convertible round? · What is a side letter in a funding round? · What founder protections should I negotiate in a term sheet? · What is a no-shop (exclusivity) clause in a term sheet?
Primary sources: Companies Act 2006 · Walford v Miles (House of Lords, 1992)
