Heads Of Terms Explained: Key Terms For Australian Business Deals

If you’re negotiating a new deal for your startup or small business, there’s a good chance you’ll be asked to sign (or send) a heads of terms.

This can feel like a relief - finally, something in writing. But it can also feel risky. Is it a contract? Can you walk away? Are you already locked into the price, exclusivity, or timelines?

A well-drafted heads of terms can save you time, money, and relationship stress by getting everyone aligned before you spend resources on detailed legal documents. A poorly drafted one can do the opposite.

Below, we’ll walk you through what heads of terms are, when you should use them, what to include (and what to avoid), and how to approach them strategically as an Australian startup or small business. This guide is general information only and isn’t legal advice - the legal effect of a heads of terms document depends heavily on the wording and the surrounding circumstances.

What Are Heads Of Terms (And Why Do Businesses Use Them)?

Heads of terms are a document that sets out the key commercial points the parties have agreed (or are close to agreeing) before they move on to drafting and signing the full-form legal agreements.

You might also hear them called:

• heads of agreement
• term sheet
• letter of intent
• memorandum of understanding

While these labels often get used interchangeably in the market, the name isn’t what decides whether something is legally binding. The actual wording and the parties’ intention is what matters.

Why Use Heads Of Terms?

From a practical small business perspective, heads of terms are usually used because they help you:

• Confirm alignment early: you can quickly test whether you and the other party are actually on the same page about the core deal points.
• Move negotiations forward: a short written document can stop the “endless email loop” and create momentum.
• Reduce drafting costs: lawyers can draft the long-form agreements more efficiently when key points are already agreed.
• Identify deal-breakers sooner: for example, exclusivity, pricing structure, IP ownership, or termination rights.
• Set a roadmap: parties can agree a timeline, due diligence process, and who is responsible for what.

Heads of terms are common in funding, partnerships, commercial deals, business acquisitions, leases, and software/technology arrangements - basically any transaction where the “full agreement” is likely to be lengthy and negotiated.

Are Heads Of Terms Legally Binding In Australia?

This is the question that matters most for business owners: are you already locked into the deal once you sign heads of terms?

The answer is: sometimes yes, sometimes no.

In Australia, a heads of terms document can be:

• fully binding (like a contract),
• partly binding (some clauses binding, others non-binding), or
• entirely non-binding (a record of intention only).

Whether it’s binding depends on factors like:

• the wording used (for example, “will” vs “may”, “must” vs “proposed”),
• whether it states it is intended to be binding or non-binding,
• whether essential terms are agreed, and
• whether the parties have acted like a deal is already done (for example, starting performance, paying money, ordering stock, or announcing publicly).

As a general principle, a contract is more likely to be enforceable when there is clear offer and acceptance and the elements of a binding agreement are present.

“Subject To Contract” And “Good Faith” Clauses

Many heads of terms try to manage risk by saying the deal is “subject to contract”. This is commonly used to indicate the parties do not intend to be bound to the main deal terms until the final agreement is signed.

However, “subject to contract” doesn’t automatically eliminate all risk in every situation. Depending on the drafting and the surrounding circumstances, a heads of terms may still create obligations on specific points (for example confidentiality or exclusivity), even if the “main deal” is not yet binding.

Similarly, clauses about negotiating in “good faith” can be tricky: whether they are enforceable, and what they require in practice, is fact-dependent and can turn on how clearly the obligation is expressed and the context of the negotiations.

If you’re unsure whether a heads of terms is binding, it’s worth checking how it stacks up against what makes a contract legally binding in Australia.

Partly Binding Heads Of Terms (Very Common)

A lot of Australian heads of terms are deliberately drafted to be “partly binding” - meaning:

• the commercial deal terms are non-binding until definitive agreements are signed, but
• certain clauses are binding immediately (such as confidentiality, exclusivity, costs, governing law, and dispute resolution).

This approach can be practical, but it needs to be drafted clearly. If it’s vague, you can accidentally end up with either:

• a deal you didn’t mean to be bound by, or
• a “handshake document” that doesn’t actually protect you during negotiations.

When Should You Use Heads Of Terms (And When Should You Skip Them)?

Heads of terms aren’t mandatory. Sometimes they’re the perfect tool; sometimes they slow you down or create unnecessary risk.

Heads Of Terms Often Make Sense When:

• The deal is complex (multiple deliverables, stages, payments, stakeholders, or dependencies).
• There’s a negotiation gap - you’ve aligned on the big picture but need to lock in key points before spending money on full documents.
• You’re doing due diligence (for example, before a business purchase or investment).
• You need interim protections like confidentiality or exclusivity while you negotiate.
• You need internal alignment (for example, board approval, investor approval, or lender approval) and you need a document to circulate.

You Might Skip Heads Of Terms When:

• The transaction is straightforward and you can move directly to a short contract.
• The other party is pushing a “binding” heads of terms as a shortcut to avoid proper negotiation of the final agreement.
• You don’t yet know enough about the deal to commit even in principle (for example, you haven’t assessed cost or feasibility).

In many situations, you might be better off going straight to a tailored contract draft or review, particularly if you’re already exchanging detailed terms and timelines. This is where a contract review early can prevent misunderstandings becoming “agreed terms”.

What Should A Strong Heads Of Terms Include?

There’s no one-size-fits-all, but most heads of terms should cover the commercial core plus any risk controls you need during negotiation.

Below are common clauses Australian startups and small businesses should consider.

1) Parties And Deal Structure

• who the parties are (including ACN/ABN details if possible)
• what the arrangement is (supply, services, joint venture, investment, acquisition, licence, etc.)
• whether it’s exclusive or non-exclusive

This sounds basic, but it matters. Misidentifying the contracting entity can create enforceability issues later (especially where groups of companies are involved).

2) Scope Of Work / Deliverables (In Plain English)

This is where you set expectations without writing a 30-page statement of work. Aim for clarity on:

• what is being provided (products/services/technology/access)
• what is out of scope
• timing and milestones
• dependencies (what you need from the other party to deliver)

If you’re a startup, this section is particularly important because it prevents “scope creep” being baked into the relationship from day one.

3) Commercial Terms: Price, Payment, And Timing

• total price or pricing formula
• payment timing (upfront, milestone-based, subscription, usage-based)
• deposit or implementation fees (if relevant)
• late payment approach (if any)

Even where the document is non-binding, clarity here helps both parties decide whether they’re investing time in the right deal.

4) Confidentiality And Information Handling

During negotiations you may share sensitive details: customer lists, product roadmaps, code, marketing strategies, and financial information.

Heads of terms often include a confidentiality clause - or refer to a separate confidentiality agreement - to protect you while you negotiate. For many businesses, a standalone Non-Disclosure Agreement is the cleanest way to manage confidentiality (especially if you’re negotiating with multiple parties at once).

5) Exclusivity (If You Agree To It)

Exclusivity means you agree not to negotiate with others (or not to finalise another deal) for a period of time.

This can be commercially reasonable in some transactions - but it’s also a major risk for a startup or small business if it prevents you from pursuing other opportunities.

If exclusivity is included, make sure it clearly states:

• the exclusivity period (start and end date)
• what is prohibited (negotiating vs signing vs performing)
• any carve-outs (for example, existing customers or inbound enquiries)
• what happens if the other party delays (do you get released?)

6) IP Ownership And Usage Rights

Even at the heads of terms stage, it’s worth flagging the big IP questions:

• who owns pre-existing IP each party brings into the deal
• who owns any new IP created during the relationship
• whether there’s a licence back to use that IP, and on what terms

This is a common deal-breaker area - and one that is much easier to align on early than to “fix later”.

7) Conditions Precedent (Things That Must Happen Before The Deal Proceeds)

Conditions precedent are practical “gates” before the definitive agreements are signed or before completion happens. Common examples include:

• due diligence being satisfactory
• finance approval
• board or shareholder approval
• regulatory approvals (if relevant)

For example, if you’re buying a business or key assets, you may need time to run checks and complete verification before you commit - and the heads of terms is often where that process is documented.

8) Timeline, Process And Responsibilities

Heads of terms can work like a mini-project plan, including:

• target dates for drafting and signing definitive documents
• who is responsible for preparing first drafts
• due diligence periods and information requirements
• a target “go-live” or completion date

This is particularly helpful if you’re working across multiple time zones, or if one party is larger and you want to avoid the deal stalling indefinitely.

9) Relationship Terms For Founders Or Investors (If Relevant)

If your heads of terms relates to equity (for example, bringing in an investor or co-founder), it can help to flag the governance fundamentals early - like decision-making, reserved matters, and exit scenarios.

Ultimately, these issues are usually captured in a tailored Shareholders Agreement, but alignment at heads of terms stage can prevent major conflict later.

Common Mistakes Small Businesses Make With Heads Of Terms (And How To Avoid Them)

Heads of terms are meant to reduce risk - but they often create risk when they’re treated as “just a formality”. Here are some common traps we see.

Mistake 1: Assuming “Non-Binding” Means “No Consequences”

Even if the main deal terms are non-binding, you may still be bound by other clauses (confidentiality, exclusivity, costs, dispute resolution).

Also, even a non-binding document can shape expectations and negotiations. If you later want to change key terms, it can damage trust or stall the transaction - so it’s important to get it right early.

Mistake 2: Leaving Key Commercial Terms “To Be Agreed”

If too many points are left unresolved, the heads of terms stops being useful - and may simply delay the real negotiation.

A good rule of thumb: heads of terms should capture the “deal drivers” and anything that would cause you to walk away if it changed.

Mistake 3: Being Too Detailed (And Accidentally Creating A Full Contract)

Some businesses try to put everything into heads of terms. The risk is that you create a document that looks, feels, and operates like a full contract - which increases the chance it’s treated as binding (even if you didn’t intend that).

If you need detailed terms, it may be time to move straight to definitive agreements and ensure the drafting is consistent across the deal documents. Depending on what you’re trying to achieve, a tailored contract drafting process may actually be faster than weeks of reworking a complicated “non-binding” document.

Mistake 4: Not Aligning Heads Of Terms With The Final Agreement

Heads of terms should be a stepping stone, not a separate universe.

If your heads of terms says one thing and your final agreement says another, you can end up with:

• arguments over what was “really agreed”,
• delays while parties renegotiate previously “settled” points, or
• commercial pressure to accept unfavourable drafting because “we already agreed it”.

If changes happen during drafting (which is normal), it helps to record those updates clearly - sometimes through an email trail, and sometimes by issuing an updated version of the heads of terms (or a short written amendment) if you want a clean, agreed record of the revised position.

Mistake 5: Signing Before You’ve Checked Practical Reality

Heads of terms often include delivery dates, KPIs, and dependencies. If you sign timelines you can’t meet (or that rely on the other party doing something they can’t meet), you’re setting up the relationship for tension from the start.

Before signing, ask yourself:

• Do we have the resources to deliver what’s described?
• Do we need third-party suppliers, approvals, or integrations?
• What happens if the other party delays? Do our deadlines move too?

Key Takeaways

• Heads of terms are a practical way to document the key commercial points of a deal before committing to detailed legal agreements.
• In Australia, heads of terms can be binding, non-binding, or partly binding - the label doesn’t decide this; the wording and intention do.
• A strong heads of terms usually covers the parties, scope, pricing, timing, conditions precedent, and any negotiation protections like confidentiality and exclusivity.
• Common risks include accidentally creating a binding contract, agreeing to exclusivity that limits your options, or leaving too many deal-breaker terms unresolved.
• Getting the heads of terms right early can save time and legal costs later, because your definitive agreements can be drafted around clear, agreed deal fundamentals.

If you’d like help reviewing or drafting heads of terms for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.