Term Sheet vs Shareholders Agreement – What’s The Difference? (2025 Updated)

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Many startup and small business owners can get confused by the differences between a Shareholders Agreement and a Term Sheet. For more detailed guidance on getting your legals in order in 2025, you might also want to check out our legal advice for startups and our business setup guides for timely tips on protecting your interests.

The main point of difference is that, generally, a Term Sheet is not intended to be legally binding, whereas Shareholders Agreements are designed to be enforceable contracts in 2025.

You often use a Term Sheet to quickly finalise the key commercial terms, which then forms the foundation for drafting a more formal and binding Shareholders Agreement.

Depending on the stage your business is at, you may require a Term Sheet or a Shareholders Agreement to govern the terms on which your company operates. For further insights on making the right choice, our article on what a Shareholders Agreement entails can be particularly helpful.

What Is A Term Sheet?

You might think of a Term Sheet as simply an informal precursor to a Shareholders Agreement, but in reality, it is a versatile document used as a pre-contractual framework for a range of commercial relationships.

For startups, a Term Sheet is commonly employed to outline brief yet crucial terms between co-founders and potential investors during capital raising rounds. In today’s competitive 2025 market, investors expect clear initial agreements that summarise the deal’s fundamentals.

This document typically covers the major aspects of the deal between founders and investors, minimising the risk of future misunderstandings and setting a solid foundation for a legally binding agreement later.

The Term Sheet does not have to be a complicated document; if it is not intended to be legally binding, it provides both investors and founders with an easy exit should the relationship no longer seem viable. It also offers the flexibility to revisit and refine terms before committing to a formal contract.

If A Term Sheet Is Not Binding, Why Might I Need It?

You may be thinking, “What’s the use of getting a Term Sheet drafted when I know a binding agreement will eventually be required?”

Many startup founders choose to have a Term Sheet prepared to demonstrate to investors that they have clearly defined the terms they expect in the deal. This clarity builds confidence in your business approach, showing that you’re well-informed and have a strong vision for the growth of your company.

In 2025, this level of preparedness is especially attractive, as investors routinely complete thorough due diligence. A well-crafted Term Sheet, which you can review alongside our convertible notes guide, minimises disagreements later when transitioning to a formal agreement.

It’s also a great way to secure an in-principle agreement on the most important terms, saving you time and legal fees that might otherwise be spent on drafting extensive agreements prematurely.

A Term Sheet gives you the opportunity to negotiate and ensure all critical deal terms are agreed upon before you formalise the relationship and issue shares to your investors.

When Do I Need A Shareholders Agreement?

If your investors are coming on board to take an equity stake in your business, it’s essential to have a Shareholders Agreement in place.

You should consider drafting a Shareholders Agreement once both you and your investors have completed due diligence and confirmed your commitment to the deal. This formal document locks in the agreed-upon terms, ensuring clarity and legal security for all parties involved.

A well-prepared Term Sheet facilitates this process by allowing founders and investors to verify all key information before moving to the drafting stage. For further reading on the necessary legal documents, have a look at our guide on choosing the right business structure.

Key components of a Shareholders Agreement in 2025 typically include company valuation, investor rights, dividend policies, and options for shareholders. Investors will generally conduct comprehensive background checks to ensure that the prospective investment meets their criteria.

Once all the relevant checks are completed and both founders and investors are ready to formalise the deal, a legally binding Shareholders Agreement should be drafted. This document then governs the ongoing relationship and operational terms as your company grows.

Getting A Shareholders Agreement

The transition from a Term Sheet to a Shareholders Agreement marks the point when the relationship between founders and investors becomes legally binding—and the investors are issued shares in your company.

You can think of a Shareholders Agreement as the critical next step in formalising the negotiations outlined in your Term Sheet. For advice on perfecting your documentation, our startup legal checklist might offer some useful pointers.

To learn more about Shareholders Agreements, you can have a read of our article here.

Generally, a Shareholders Agreement is more extensive than a Term Sheet. It will include all the key provisions that were initially agreed upon, along with additional details covering:

Your startup’s business operations
Directors’ duties
The process when a shareholder wishes to exit
Mechanisms for handling disputes

Shareholders Agreements can be complex and lengthy documents, depending on the level of detail you wish to include. It is advisable to review current industry standards—our recent update on business structure considerations provides some up-to-date insights for 2025.

In today’s rapidly evolving business environment, it’s also important to periodically review your legal documents. As your company grows and market conditions change, revisiting your Term Sheet or Shareholders Agreement with advice from a qualified lawyer—as detailed in our business structure amendment guide—can help ensure that your agreements remain robust and reflective of current best practices.

What To Take Away

Depending on the stage your new business is at in 2025, you might opt to have either a Term Sheet or a Shareholders Agreement drafted as part of your investor negotiations.

Both documents are crucial in ensuring a mutually beneficial and clearly defined relationship between shareholders, helping to prevent misunderstandings as your company expands. Reviewing resources such as our business partners guide can further enhance your understanding of these legal instruments.

If you have any questions about whether you need a Term Sheet or Shareholders Agreement, or if you need help getting one drafted, feel free to drop us a line at team@sprintlaw.com.au. We’re here to help ensure your legal documents set you up for success in the dynamic business climate of 2025!

Esha Kumar

Esha is a law graduate at Sprintlaw from the University of Sydney. She has gained experience in public relations, boutique law firms and different roles at Sprintlaw to channel her passion for helping businesses get their legals sorted.

Lauris de Clifford

Lauris is a commercial lawyer at Sprintlaw. After working at a top-tier law firm, she has worked across NewLaw firms specialising in online businesses, privacy and employment law.