Term Sheets: What To Include And How They Work

Whether you’re raising capital, bringing in a co-founder, or selling part of your business, you’ll likely hear one phrase early in the process: “let’s draft a term sheet.”

Term sheets are the roadmap for major deals. They set out the commercial terms up front, help both sides align expectations, and reduce surprises before lawyers draft the full contracts.

In this guide, we’ll explain what a term sheet is in Australia, when to use one, which terms to include, how binding they should be, and the most common pitfalls to avoid. Our aim is to help you negotiate with confidence and move from handshake to signed deal smoothly.

What Is A Term Sheet In Australia?

A term sheet is a short, plain-English document that records the key commercial terms the parties have agreed in principle for a proposed transaction.

You can use a term sheet for a wide range of deals, including equity investments, acquisitions, joint ventures, and significant supplier or distribution arrangements. It’s usually the first written step after initial discussions, and before full legal drafting begins.

Think of a term sheet as your deal blueprint. It doesn’t replace the final agreements, but it guides them. Having a well-structured Term Sheet helps everyone move faster, reduce misunderstandings, and control legal costs later.

When Should Your Small Business Use A Term Sheet?

You don’t need a term sheet for every transaction. But it’s smart to use one when the deal is complex, involves material risk, or requires board or investor approval. Common examples include:

• Equity capital raising (seed, Series A, strategic investment)
• Issuing a Convertible Note or a SAFE Note
• Bringing on a co-founder or advisor with equity or options
• Partial or full sale of your business/assets
• Exclusive distribution or licensing arrangements
• Forming a joint venture or long-term collaboration

In these scenarios, big-picture issues (valuation, control, risk allocation, milestones, exit rights) matter. Locking those down early makes the rest of the process more predictable.

What Should A Term Sheet Include?

The right content depends on the type of deal, but most term sheets cover the following areas. Keep language clear and avoid legalese. The goal is shared understanding.

1) Parties And Purpose

• Who is involved and what you’re trying to achieve (e.g. “$500,000 equity investment into ABC Pty Ltd for growth and hiring”).

2) Structure Of The Deal

• Is it an equity subscription, a convertible instrument, an asset purchase, or a services/licensing arrangement?
• For equity, specify whether it’s ordinary shares, preference shares, or options, and the key features of each class.

3) Valuation And Economics

• Pre-money valuation and how it was calculated.
• Investment amount and percentage ownership post-transaction.
• Any price adjustments (e.g. working capital adjustments for acquisitions).

4) Cap Table And Dilution

• Existing cap table and any plan for an options pool.
• Dilution mechanics (e.g. anti-dilution for future down rounds, if negotiating with investors).

5) Governance And Control

• Board seats, observer rights and voting thresholds for major decisions.
• Reserved matters that require investor or co-founder consent (issuing new shares, changing constitution, major spend).

6) Investor Or Seller Protections

• Information rights (regular financial reporting, inspection rights).
• Warranties and indemnities to be included in the definitive agreements.
• Conditions precedent (e.g. due diligence, regulatory approvals, consents from landlords or key suppliers).

7) Founder And Key Person Commitments

• Vesting for founder shares or options, including acceleration on exit or termination without cause.
• Non-compete, non-solicit and confidentiality obligations.

8) Exit And Liquidity

• Drag-along and tag-along rights for share sales.
• Dividend policy and any redemption rights (if using preference shares).

9) Timeline And Process

• Target dates for due diligence, definitive documents, and completion.
• Who drafts what, and who pays legal and other transaction costs.

10) Binding Vs Non-Binding Terms

• Most commercial terms are “non-binding” (intended but not legally enforceable until the final contracts).
• Some clauses should be “binding” immediately, like confidentiality, exclusivity/no-shop, costs, and governing law.

After signing the term sheet, the parties (and their lawyers) translate it into formal documents like a Share Subscription Agreement, investors’ rights agreements, or a Shareholders Agreement.

Are Term Sheets Legally Binding?

Most term sheets are “partially binding.” The commercial terms are usually stated as “subject to contract,” meaning neither side is legally obliged to complete the deal until the final contracts are signed.

However, certain clauses are commonly binding from day one:

• Confidentiality: Keep the deal and each other’s information private (even if a separate Non-Disclosure Agreement is also in place).
• Exclusivity (no-shop): For a limited time, you’ll negotiate only with each other.
• Costs: Who pays their own costs, and any reimbursement rules if the deal falls over.
• Governing law and jurisdiction: Typically an Australian state or territory law.

Be explicit. A short binding/non-binding statement at the top or bottom of the term sheet avoids confusion and reduces the risk of a dispute about enforceability.

Term Sheet, Heads Of Agreement Or MOU: What’s The Difference?

In practice, these terms are often used interchangeably. The key point is not the label, but clarity about which parts are binding.

• Term Sheet: Common in investment and venture deals, focused on commercial terms and economics.
• Heads of Agreement: Broadly similar, often used in business sales or commercial arrangements.
• MOU (Memorandum of Understanding): A more general statement of intent, sometimes lighter on detail.

Whatever you call it, make sure the document sets out the key terms, identifies binding clauses, and includes a sensible process and timeline.

How To Negotiate A Term Sheet (Without Derailing The Deal)

Negotiating doesn’t need to be adversarial. The best outcomes are collaborative and realistic. Here’s how to approach it.

Prioritise The Big Rocks

Focus on valuation, ownership, control rights, founder vesting, and exit mechanics first. If you can’t agree on these, debating drafting details won’t help.

Know Your Red Lines And Trade-Offs

Decide what you can compromise on and what you can’t. For example, a slightly lower valuation might be acceptable if you secure better governance protections or a bigger options pool for growth hires.

Use Clear, Plain Language

Term sheets aren’t the place for dense legal drafting. Write in short clauses that a non-lawyer can follow. It reduces misunderstandings and speeds up the final contracts.

Protect Timing And Momentum

Deals lose steam when they drag. Put realistic dates on diligence and completion and stick to them. If something slips, communicate early and adjust the timeline together.

Think Ahead To Definitive Documents

Ensure your term sheet aligns with the documents you’ll sign later (for equity, that’s typically a Share Subscription Agreement and a Shareholders Agreement; for notes, a convertible note deed; for sales, a business sale agreement). Clarity now saves time and fees later.

Consider Investor Instruments

Early-stage funding might use simple instruments like a SAFE Note or Convertible Note. Your term sheet should capture key triggers and caps (valuation cap, discount, maturity, interest for notes, and conversion events). Keep the mechanics simple and transparent.

Common Mistakes To Avoid

We see these errors frequently-and they can be costly. Keep an eye out for the following.

1) Ambiguous Or Missing Core Terms

Vague statements like “founders will vest over time” create problems. Spell out the vesting schedule, acceleration rules, and what happens on termination for cause vs without cause.

2) Forgetting Binding/Non-Binding Language

If you don’t specify which parts are binding, you risk a dispute about whether someone can walk away. Include a clear statement on the document’s status.

3) Overlooking Control And Governance

Even small investments can affect decision-making. Define reserved matters, board composition, and approval thresholds at the term sheet stage to avoid surprises later.

4) Ignoring Cap Table Impacts

Adding an options pool or new class of shares affects everyone’s percentage. Include a sample post-money cap table to confirm how ownership will look after completion.

5) No Plan For Due Diligence And Conditions

List the key conditions precedent and how they’ll be satisfied (financial, legal, IP, key contracts, consents). A simple checklist prevents a last-minute scramble.

6) Skipping Confidentiality And Exclusivity

Without confidentiality or an exclusivity window, you risk leaking sensitive information or losing momentum if the other side shops the deal.

7) Not Linking To The Right Definitive Documents

Set expectations about the contracts to follow. For equity raises, that is commonly a Share Subscription Agreement and a Shareholders Agreement. Flagging the next steps keeps everyone aligned.

Practical Term Sheet Tips For Australian Small Businesses

• Use a short cover summary that lists the five or six headline terms (valuation, amount, ownership, governance, vesting, timeline). Busy stakeholders appreciate the snapshot.
• Match your term sheet to your stage. Early-stage deals can be relatively light; later-stage or strategic investments may need more detail.
• If you’re sharing sensitive data, use a separate Non-Disclosure Agreement in addition to any confidentiality clause in the term sheet.
• Plan for the next documents. If equity is involved, expect to move from term sheet to Share Subscription Agreement and governance documents like a Shareholders Agreement.
• If you’re not sure which instrument to use (equity vs note vs SAFE), discuss your goals and timeline with prospective investors early, and document those choices in the term sheet.

What Happens After You Sign A Term Sheet?

Once the term sheet is signed, the real work begins: due diligence, contract drafting, and completion. Here’s what to expect.

• Due Diligence: Investors may review your financials, key contracts, IP ownership, and compliance. Prepare a simple data room to speed things up.
• Definitive Documents: Lawyers convert the agreed terms into the final contracts. Expect markups and a few negotiation loops.
• Approvals And Consents: You may need shareholder approvals, bank consents, landlord assignments, or regulator sign-offs depending on the deal.
• Completion: When all conditions are satisfied, you complete-funds flow, shares issue or transfer, and new arrangements take effect.

For smooth execution, keep the drafting aligned to the term sheet. If something needs to change, discuss the impact and document the variation, so there are no surprises.

FAQs About Term Sheets (For Small Businesses)

Is a lawyer required to prepare a term sheet?

Not legally, but it’s a good idea. A concise, well-structured term sheet sets up the rest of the deal. Getting guidance now often leads to faster, cleaner final contracts and fewer roadblocks.

Can we skip the term sheet and go straight to contracts?

You can, but it often takes longer and costs more. A term sheet aligns commercial expectations first, so the drafting phase is focused and efficient.

Do we need other documents alongside a term sheet?

Usually, yes. For capital raises, expect documents like a Share Subscription Agreement and a Shareholders Agreement. For confidentiality, use an Non-Disclosure Agreement. For certain commercial collaborations, a more detailed Heads of Agreement may follow or replace a term sheet.

What if we’re raising via a SAFE or convertible note?

Include the key mechanics in your term sheet: valuation cap, discount, conversion events, maturity, and interest (for notes). You can reference a SAFE Note or Convertible Note template as the basis for the definitive instrument.

Key Takeaways

• A term sheet is a short, practical blueprint for your deal that aligns expectations before full contracts are drafted.
• Use term sheets for complex or high-value transactions such as equity raises, notes/SAFEs, acquisitions, and strategic partnerships.
• Cover the essentials: deal structure, valuation, governance, founder vesting, investor protections, timelines, and which clauses are binding.
• Make confidentiality and exclusivity binding, and keep commercial terms non-binding until you sign the definitive documents.
• Avoid ambiguity. Plain language and clear numbers reduce friction and speed up completion.
• Plan the next steps early-expect to move from term sheet to a Share Subscription Agreement, a Shareholders Agreement, or other definitive contracts that mirror the agreed terms.

If you’d like a consultation about preparing or negotiating a term sheet for your Australian business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.