Term Sheet

A term sheet covers the points that decide whether a deal is worth pursuing: the price, what is being bought and the rights each side will have afterwards. Suppose an investor offers to put money into a software company in return for a minority stake. Before anyone pays lawyers to draft the full contracts, both sides want the main points on two or three pages.

In an investment, the term sheet states the valuation, the amount invested and the class of shares issued. It lists the investor's rights, such as a board seat, consent rights over major decisions and rights to information. In a company sale, the equivalent points are the price, how it is paid and what is included. Either kind usually ends with the conditions to be met before signing, a timetable and a statement of who bears the costs.

The full contracts are then drafted from it: in an investment, typically an investment agreement and a shareholders' agreement.

Mostly not, if it is drafted in the usual way. A term sheet normally says that its commercial terms create no obligation to conclude the deal, and that a small number of clauses bind from signature. The binding clauses are typically confidentiality, exclusivity, costs and the choice of governing law.

That split is a drafting matter, and the title of the document does not settle it. Whether a given clause binds is decided by the governing law, which looks at what the parties wrote and may also look at how they behaved. Some legal systems attach duties to the negotiations themselves. State clause by clause what binds and what does not. Keep words of commitment out of the commercial terms. Name the conditions that still have to be met.

A term sheet differs from a letter of intent in form and in customary use, not in legal effect, so the name does not decide whether the document binds. A term sheet sets the terms out as a list or a table and is the usual name in venture capital investments and in financing, while a letter of intent is written as a letter and is more common in company acquisitions.

Yes, in principle. Article 25(1) of the eIDAS Regulation says that an electronic signature cannot be denied legal effect or refused as evidence solely because it is electronic. Article 2(3) leaves national rules on the form of contracts in place, so the governing law decides whether any clause needs a particular form.

Some term sheets are never signed. A signature matters because of the binding clauses. A party that later relies on the exclusivity clause will need to show who signed, and that the signer could bind the company. What a qualified electronic signature proves, and what evidence of authority has to be added, is the same as for a letter of intent.

Before the business relationship with the client is established, which may be earlier than the engagement letter. A term sheet is often negotiated before the adviser's own terms are signed. Article 19(1)(a) of the EU Anti-Money Laundering Regulation requires customer due diligence when a business relationship is established, and Article 2(1)(19) allows such a relationship to exist where there is no written contract. Identity has to be verified before that point, with limited exceptions for low-risk cases (Article 23(1) and (2)). The timing rules are the same as for a letter of intent.

The advisers concerned are lawyers, notaries, external accountants and tax advisers. External accountants and tax advisers are obliged entities under Article 3(3)(a). Lawyers and notaries come within the regulation when they help a client plan or carry out certain transactions, among them the purchase or sale of a business entity (Article 3(3)(b)).

As a rule, the duty concerns the adviser's own client and not the other side of the deal. A notary or lawyer who is the only legal professional intermediating the transaction must treat both parties as customers (Article 19(6)(b)). The regulation applies from 10 July 2027. Until then, the national laws that implement the EU anti-money laundering directives apply.

Often, yes. A term sheet for an investment names the founders and may set out their shareholdings, their vesting terms and their pay. That is personal data, and the GDPR applies to it whatever the confidentiality clause says. Under Article 5(1)(c) of the GDPR, the personal data in the term sheet and in the material sent with it must be limited to what the purpose requires. Each party that handles the data needs one of the legal grounds listed in Article 6(1).

More personal data follows once the investor starts its due diligence, and the same rules apply to it.

Keep the signed version, the evidence of who signed it and the drafts that show how the terms changed. The term sheet is the reference point when the full contracts are negotiated. The binding clauses may be relied on after the talks end, so the record is needed at least for the limitation period under the governing law.

Advisers covered by anti-money laundering rules have a separate duty. Under Article 77, they keep a copy of the documents and information obtained in customer due diligence for five years from the end of the business relationship.