What Is a Term Sheet? A Clear Guide for Australian Businesses

Thinking about raising investment, partnering with another company, or selling your business? Stepping into any of these deals often means you’ll hear the term “term sheet.” But what is a term sheet, and why does it matter for your business in Australia?

If you’re building your business, negotiating big deals can feel intimidating-especially if legal jargon starts flying around. The good news is, understanding a term sheet can give you real confidence during these crucial moments. In this guide, we’ll break down what a term sheet is, why it matters, and how you can use one to set your business up for long-term success. As always, we’ll focus on the Australian legal landscape-so you’re getting information that’s practical and reliable.

Ready to get clear on this essential business document? Let’s dive in.

What Is a Term Sheet?

A term sheet is a non-binding document that outlines the key terms of a proposed business deal. Think of it as a roadmap for negotiations-it sets out what both sides have agreed in principle, before you dive into detailed legal contracts.

In Australia, term sheets are widely used for investment rounds (especially with startups), mergers and acquisitions, joint ventures, and even some supplier or partner arrangements. While a term sheet itself is usually not legally binding (with some exceptions-see below), it guides the drafting of final binding agreements, such as Shareholders Agreements or Sale of Business Agreements.

If you’re wondering “what is a term” in this context, it simply means a specific point or condition that forms part of a larger agreement.

Why Use a Term Sheet?

Term sheets offer real advantages for business owners and investors alike:

• Clarity: They help both sides understand the deal’s primary points before investing time (and legal fees!) in complex contracts.
• Negotiation Tool: A term sheet is a foundation for negotiation-you can identify major sticking points early, rather than getting lost in the detail of a 30-page contract.
• Faster Progress: With the core terms agreed, your lawyers can move quickly on final documents, streamlining the whole transaction.
• Reduced Risk: While not foolproof, documenting the main terms early makes disputes less likely down the track.

For example, let’s say you’re seeking investment in your tech startup. You sit down with a potential investor and discuss how much they’ll put in, what percentage of equity they’ll get, any special rights, and so on. Rather than jumping straight into a binding Shareholders Agreement, you agree to set out the main points in a concise, plain-English term sheet first. This way, you make sure everyone’s on the same page before committing.

What Does a Term Sheet Typically Include?

Term sheets are flexible, but they usually cover:

• Parties: Who is involved in the deal?
• Valuation & Amount: How much is being invested, paid, or exchanged?
• Equity or Ownership Structure: What percentage of shares or ownership is at stake?
• Key Rights and Obligations: Such as board seats, voting rights, rights to future investment, or special controls.
• Timelines: When will major steps happen?
• Conditions Precedent: Any conditions that must be met before the full contract is signed (such as due diligence).
• Exclusivity or Confidentiality Clauses: Whether one or both parties agree not to negotiate with others for a period, or to keep details secret.
• Termination Clauses: How either party can walk away before the final agreement.
• Legal Effect: Is the term sheet binding at all, or just an agreement to negotiate?

Remember, most commercial term sheets in Australia are not intended to be binding on either party (except, sometimes, for confidentiality and exclusivity clauses). But it’s crucial to document the intent clearly, to avoid accidental binding contracts-a known legal pitfall.

Types of Deals That Use a Term Sheet

Term sheets are particularly common in the following situations:

• Capital Raising & Investment: Startups and established companies alike use term sheets when negotiating with angel investors or venture capitalists. The sheet outlines things like investment amount, valuation, share class, and investor rights.
• Mergers and Acquisitions: If you’re buying or selling a business, a term sheet (or sometimes a related “heads of agreement”) will outline the main commercial points, before the Sale of Business Agreement is drafted. Learn more about the mergers and acquisitions process here.
• Joint Ventures & Partnerships: When two businesses collaborate, a term sheet can clarify profit share, roles, decision-making processes, and exit mechanisms. See our guide on joint ventures versus partnerships.
• Other Major Transactions: Supplier or distributor relationships, licensing deals, or major customer contracts where both sides want to agree the business points up front.

Are Term Sheets Legally Binding in Australia?

This is one of the most common-and important-questions we hear.

Generally, Australian term sheets are not legally binding, unless certain clauses are expressly made binding (such as confidentiality or exclusivity). The idea is to give both parties confidence without locking them into every detail before full due diligence and negotiations are finished.

However, Australian courts will look at the precise wording. If your term sheet is poorly drafted, uses phrases like “agreement” rather than “proposal” or includes language suggesting both sides “must” do certain things, you could inadvertently create a binding contract. That’s why it’s important to clearly spell out which parts are intended to be binding and which are not-a good business lawyer can help draft this appropriately. Read more about contract options and expiry here.

Why Is a Term Sheet Important for Startups and Small Businesses?

When you’re starting out or growing quickly, a term sheet helps you clarify expectations and “test” investor or partner appetite without committing legal resources up front. This is especially true in Australia’s startup sector, where investment deals move quickly and negotiations can start informally.

It also helps protect you from common beginner mistakes, such as giving away excessive equity too early or agreeing to unfavourable control terms that could affect your business’s future. By putting main points on the table from the beginning, you ensure transparency and save time (and money) on legal wrangling later.

Key Legal Considerations When Using a Term Sheet

1. Clearly State What’s Binding

Explicitly say which clauses (if any) are binding-often just confidentiality and exclusivity. Make it clear that everything else is “subject to contract,” which means a further formal agreement is needed before anything is legally enforceable.

2. Be Careful with Wording

Use phrases such as “subject to negotiation and execution of formal agreements” rather than “agreed,” unless you genuinely mean for a term to be enforceable. Precision is critical.

3. Consider Australian Consumer Law

Are any of the terms likely to be “unfair contract terms” under the Australian Consumer Law? This is especially important when negotiating with smaller parties or consumers.

4. Think About Tax and Structuring

Major deals often have tax or structuring consequences (especially equity investments or business sales). Get professional advice before you agree to points in your term sheet-sometimes the way the deal is structured on paper has real tax impacts later.

5. Don’t Rely on a Template

While there are plenty of term sheet templates online, each deal and business relationship is unique. It’s wise to tailor your term sheet to your specific situation, especially since mistakes can tie you up in disputes or even costly litigation.

What Happens After Signing a Term Sheet?

Once a term sheet is signed (remember-usually just as a broad agreement in principle, not a binding contract), here’s the typical process:

1. Due Diligence: Both sides investigate and confirm all key information (e.g., financials, legal compliance, intellectual property, customers).
2. Full Legal Documents: Your lawyers draft and negotiate the legally binding contracts-these reflect the core terms from the term sheet, plus extra legal detail (such as warranties, indemnities, dispute resolution, etc.).
3. Signing & Completion: Once final agreements are signed, the deal is formally completed (e.g. shares are issued or transferred, money changes hands).

Sometimes, issues uncovered in due diligence can lead to adjustments in the final agreement or even cause the deal not to proceed. This is another reason why having a clear, non-binding term sheet protects both sides at the early stage.

How Do I Prepare a Term Sheet?

Here are some practical steps to help you prepare a useful and effective term sheet in Australia:

1. Be Clear on Your Goals: Know what you want out of the deal, and what you’re willing (and not willing) to give up.
2. Map Out the Key Terms: Write down your preferred terms for money, equity, control, milestones, and any special arrangements.
3. Consider Binding and Non-Binding Clauses: Decide if you want confidentiality or exclusivity to be binding. Make it explicit in the document.
4. Seek Legal Advice: It’s always best to have a legal expert review (or draft) your term sheet to ensure it’s clear and doesn’t leave unintended gaps that could risk your business. Learn more about Sprintlaw’s term sheet drafting services here.
5. Negotiate in Good Faith: Remember, the term sheet is a tool for negotiation-not a place to “trick” the other party. Be open to discussing and adjusting terms. If things stall, sometimes a lawyer-moderated negotiation can help.

What Legal Documents Come After a Term Sheet?

After the term sheet, you’ll usually move to more detailed, binding documents. The exact documents depend on the type of deal, but for many Australian businesses, these may include:

• Shareholders Agreement: Sets out how the business is governed, how decisions are made, and rights of investors or founders. See our Shareholders Agreement guide for details.
• Share Subscription Agreement or Share Sale Agreement: Covers the issue, sale, or transfer of shares and the obligations of each party.
• Asset Sale Agreement: If you’re selling or buying business assets (not shares), this agreement covers the terms for transfer of assets, liabilities, and more.
• Service or Supply Agreements: These set out ongoing relationships such as distribution, supply, or consulting following the deal.
• Employment Agreements: If staff or key persons are involved, new contracts or variations may be needed.
• Intellectual Property Assignment: Important when transferring patents, trademarks, or other IP.

These documents are much more detailed than a term sheet. Having the business foundations and major commercial terms clear from your term sheet makes drafting these documents far smoother.

Other Business and Legal Tools to Consider

Your term sheet is just one step in the process of securing investment, forming partnerships, or selling your business. Here are other key tools and documents you might need as your business grows:

• Business Plan: Documenting your vision, financial forecasts, and growth plans is invaluable for guiding negotiations and attracting investors.
• Non-Disclosure Agreement (NDA): To protect your confidential information during early discussions. Explore NDA options here.
• Company Registration: If you’re moving from a sole trader to a company structure before investment or a big partnership, check our company set up service.
• Protection of Trade Marks: Especially important if collaborating with others or seeking external investment. Learn about trade mark protection.

Key Takeaways

• A term sheet captures the basic commercial terms of a business deal before legally binding contracts are signed.
• It’s usually non-binding (except for specific clauses), giving both sides flexibility and clarity early in negotiations.
• Term sheets are widely used in Australian investments, acquisitions, partnerships, and major supplier or customer deals.
• Always clarify what’s binding and ensure your term sheet is well-drafted to avoid disputes-or accidental contracts.
• The term sheet guides the drafting of more detailed and enforceable agreements like Shareholders Agreements or Sale Agreements.
• Professional legal advice is highly recommended-mistakes at the term sheet stage can have lasting impacts on your business.

If you’d like a consultation on preparing, reviewing, 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.