Heads Of Agreement Vs Term Sheet: Which Do You Need?

You've had a promising conversation about a deal, investment or collaboration, and everyone wants to keep momentum going. The tricky part is knowing what to put in writing before the full contract is ready.

That early document can be incredibly useful. It can lock in the main commercial terms, give each side comfort to spend time and money on the deal, and stop misunderstandings before they grow.

But the label matters less than what the document actually says. A heads of agreement, term sheet, letter of intent or memorandum of understanding can be binding, non-binding or a mix of both depending on the wording and the surrounding circumstances.

What Is The Difference Between A Heads Of Agreement And A Term Sheet?

A heads of agreement usually records the main deal terms for a broader commercial transaction, while a term sheet is most often used for investment, fundraising and startup deals.

In practice, there can be overlap. You might see either document used for:

• Buying or selling a business
• Entering a joint venture or strategic partnership
• Licensing technology or intellectual property
• Raising capital from investors
• Setting up a distribution, supply or reseller arrangement

The real question isn't only what you call it. It's whether the document clearly says which parts are binding now and which parts are just an agreed pathway to a later contract.

For example, a heads of agreement for a business sale might say the purchase price is $450,000, the buyer gets 30 days for due diligence, and both sides must keep the negotiations confidential. The confidentiality and exclusivity clauses might be binding straight away, while the sale itself only becomes binding once a business sale agreement is signed.

A fundraising term sheet for a startup investment might set out the investment amount, valuation, share class, investor rights and conditions before completion. The final documents may include a share subscription agreement, shareholders agreement and updated company constitution under the Corporations Act 2001.

So, for heads of agreement vs term sheet, think about the deal type first, then the level of legal commitment you want before the final documents are drafted.

When Should You Use A Heads Of Agreement?

You should use a heads of agreement when you want to record the key commercial terms of a deal before committing to the final contract.

Heads of agreement are common where a deal has several moving parts and both sides need a shared roadmap. They work well for business purchases, commercial collaborations, licensing arrangements, supply deals and some property-related commercial transactions.

Say you run a cafe group in Brisbane and you're negotiating to buy a small wholesale bakery for $380,000. Before paying for accountants, lawyers and stocktake work, you may want a heads of agreement that sets out:

• The proposed purchase price and deposit
• What assets are included, such as equipment, customer lists, recipes and goodwill
• Whether staff are transferring
• A 21 day due diligence period
• Confidentiality obligations
• An exclusivity period, so the seller doesn't shop the deal around while you spend money reviewing it
• The target completion date
• Any conditions, such as finance approval or landlord consent

This gives you something concrete to work from, without trying to draft the final sale contract too early.

Just be careful with language like agreed, shall, must and will proceed. If the document reads like a final deal and the key terms are certain enough, a court may treat parts of it as binding even if the title says heads of agreement. If you only want some clauses to be binding, say that clearly and list them.

When Should You Use A Term Sheet?

You should use a term sheet when you're setting out the commercial terms of an investment, fundraising round or startup equity deal.

In the startup term sheet Australia context, the document is often used before lawyers prepare the detailed investment documents. It helps you and the investor agree on the big-ticket items first, so you're not negotiating everything from scratch in long-form documents.

A typical startup term sheet might cover:

• Investment amount
• Pre-money and post-money valuation
• Share type, such as ordinary shares or preference shares
• Board appointment rights
• Founder vesting or reverse vesting
• Information rights for investors
• Anti-dilution protections
• Conditions before completion
• Who pays legal costs

Here's a simple example. Maya runs a SaaS business through an Australian proprietary company. An angel investor offers to invest $250,000 for 10 percent of the company on a post-money basis. That means the post-money valuation is $2.5 million, and the pre-money valuation is $2.25 million.

If the term sheet doesn't say whether the 10 percent is calculated before or after an employee option pool is created, Maya could give away more equity than she expected. For example, a 10 percent option pool created before the investment can dilute the founders before the investor comes in. That one drafting point can change the economics of the deal.

For company fundraising, you'll also need to think about the Corporations Act 2001, ASIC requirements and whether any disclosure exemptions apply. The term sheet isn't a substitute for proper fundraising documents, but it helps everyone agree on the commercial position before those documents are prepared.

Is A Letter Of Intent Or MOU The Same Thing?

It depends, because a letter of intent and memorandum of understanding can do a similar job, but they're usually used in slightly different contexts.

A letter of intent often signals that you want to proceed with a deal and sets out the proposed pathway. You might use one when you're bidding for a business, exploring a major supply arrangement or giving a potential partner comfort that you're serious.

A memorandum of understanding, often called an MOU, is commonly used where the relationship is broader or more collaborative. You might use an MOU for a pilot project, referral arrangement, research collaboration or partnership discussion where the parties want to record shared expectations before a formal contract.

Compared to heads of agreement, an MOU can feel softer and more relationship-focused. Compared to a term sheet, it usually has less detail on valuation, shares and investor rights. But again, the name isn't decisive.

If a letter of intent says one party must pay a $20,000 break fee if they walk away after due diligence, that clause may be binding. If an MOU says the parties agree to negotiate exclusively for 60 days and keep all shared data confidential, those obligations may also be binding.

The safest approach is to include a clear binding and non-binding clause. For example, you can say the commercial deal terms aren't binding until the final agreement is signed, but confidentiality, exclusivity, costs, governing law and dispute process are binding from the date of signing.

Which Clauses Should Be Binding Before The Final Contract?

The clauses that should usually be binding are the ones that protect your business while you're deciding whether to proceed with the deal.

You may not want to be locked into the whole transaction yet. But you probably do want protection if you're sharing financial information, customer lists, pricing models, product plans, source code, employee details or trade secrets.

Clauses That Are Commonly Binding

• Confidentiality: Stops the other party from misusing your sensitive business information.
• Exclusivity: Gives you a set period where the other party won't negotiate the same deal with someone else.
• Due diligence access and limits: Sets out what information can be reviewed and how it can be used.
• Costs: Clarifies who pays legal, accounting, valuation and other deal costs.
• Intellectual property ownership: Confirms that sharing materials doesn't transfer ownership.
• Privacy and data handling: Helps manage personal information under the Privacy Act 1988 where customer, employee or user data is shared.
• Public announcements: Stops either side announcing the deal without approval.
• Governing law: Confirms which Australian state or territory law applies.
• Dispute process: Gives a practical process if there's a disagreement before completion.

You should be cautious about making price, completion obligations or minimum purchase commitments binding too early. If you haven't finished due diligence, confirmed finance, checked key contracts or obtained consents, you may need flexibility.

Australian Consumer Law can also be relevant if your pre-contract statements are misleading or deceptive in trade or commerce. Even where a deal isn't final, you should avoid overstating revenue, customer numbers, licences, approvals or performance. If a statement helps persuade the other side to proceed, make sure it can be backed up.

Good pre-contract drafting gives you a middle ground: enough certainty to move forward, without accidentally signing up to the whole deal before you're ready.

What Should You Put In Your Pre-Contract Document?

You should put in the key commercial terms, the process for moving forward, and a clear statement about what is binding now.

A lawyer should tailor the document before you use it, especially if money, equity, IP, data or exclusivity is involved. Templates can be a useful starting point, but they often miss deal-specific risks or use wording that makes more of the document binding than you intended.

A Practical Fill-In Outline

1. Parties: Write the full legal names, including ACN for companies and ABN where relevant.
2. Background: Briefly explain the proposed deal and why the document is being signed.
3. Commercial Terms: Set out price, investment amount, valuation, scope, assets, shares, services or deliverables.
4. Conditions: List anything that must happen before the final deal proceeds, such as finance, board approval, due diligence, ASIC steps or landlord consent.
5. Timeline: Include key dates for due diligence, final documents, approvals and completion.
6. Binding Clauses: State exactly which clauses are binding from signing.
7. Non-Binding Clauses: State which commercial terms are only an expression of intention until the final agreement is signed.
8. Confidentiality: Explain what information is protected and how long the obligation lasts.
9. Exclusivity: If needed, set the exact period, such as 30, 45 or 60 days, and what conduct is restricted.
10. Costs: Say who pays their own costs and whether any costs are reimbursed if the deal doesn't proceed.
11. Ending The Process: Explain when either side can walk away and what obligations continue afterwards.
12. Governing Law And Signatures: Choose the relevant Australian state or territory and have authorised signatories sign.

Common Mistakes To Avoid

• Using the wrong company name or leaving out the ACN, which can create confusion about who is bound.
• Calling the document non-binding but using mandatory language throughout.
• Forgetting confidentiality before sharing financials, customer data or IP.
• Agreeing to exclusivity without a clear end date.
• Leaving valuation mechanics vague in a startup investment term sheet.
• Assuming a handshake or email chain is harmless. In some cases, emails can form or support a binding agreement.

Before you sign, ask yourself one simple question: if this deal falls over next week, what parts of this document do I still need to be able to rely on? Those are the clauses that deserve the most careful drafting.

Key Takeaways

• A heads of agreement is usually best for broader commercial deals, such as business sales, collaborations, licensing and supply arrangements.
• A term sheet is usually best for investment and startup fundraising, especially where valuation, shares and investor rights need to be agreed early.
• A letter of intent or MOU can be binding or non-binding depending on the wording, not the title.
• Confidentiality, exclusivity, costs, privacy, IP ownership and governing law are often the clauses you want binding before the final contract.
• Be clear about which terms aren't binding until the final agreement is signed, so you don't commit before due diligence is finished.
• Get the document tailored if you're dealing with equity, business assets, sensitive data, valuable IP or a high-value deal.

If you'd like help with choosing the right pre-contract document, drafting your heads of agreement or term sheet, or reviewing the binding clauses before you sign, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.