Term Sheet

Whether in the context of a company acquisition or negotiations with investors, the use of a Term Sheet has become increasingly common, serving as the first step towards the conclusion of a contract.

Contents

• What is a Term Sheet?
• What are the key provisions of a Term Sheet?
• Is a Term Sheet legally binding?
• What happens if no investment takes place?
• How detailed shoud a Term Sheet be?
• Conclusion & Support from GEMS Schindhelm
   

What is a Term Sheet?

A Term Sheet is a document drawn up prior to a transaction or financing round, recording the main points of the future agreement between the contracting parties. Ideally, the provisions set out in the Term Sheet will be reflected in the final contract. Essentially, it is a written declaration of intent that can be voluntarily drafted to provide both parties with a degree of certainty—without yet “setting anything in stone.”

What are the key provisions of a Term Sheet?

Since a term sheet is not binding, there are no clear guidelines regarding its content. In practice, however, it has proven useful to set out the essential elements of the planned contract and the intended cooperation. Depending on the subject matter of the contract, a Term Sheet typically covers the following key aspects:

• Timeline of the transaction
• Amount of intended financing and use of funds
• Company valuation methodology
• Exit arrangements
• Confidentiality provisions (Non-Disclosure Agreements – NDAs)
• Exclusivity agreements
• Non-competition clauses

Is a Term Sheet legally binding?

A Term Sheet is not a substitute for the contract itself and is generally characterized as non-binding. It is intended to summarize the current status of the transaction, reflect any verbal agreements already reached, and outline the next steps. Thus, the Term Sheet serves a moderating function and is often drafted in a non-binding manner.

Nevertheless, a Term Sheet is designed to have a certain psychological binding effect. Once framework conditions are defined, the parties are discouraged from deviating from them, as a breach of agreed conditions may jeopardize the entire transaction. In practice, parties usually adhere to the agreed framework of the Term Sheet, which underlines its importance in business transactions.

An exception to the non-binding nature applies to confidentiality clauses—covering data, facts, and business documents disclosed during the transaction—as well as exclusivity provisions, which prohibit negotiations with another potential contractual partner for an agreed period of time. These provisions are often explicitly binding and may give rise to claims for damages in the event of a breach. Such clauses are commonly highlighted separately within the Term Sheet.

What happens if no investment takes place?

Once negotiations begin, a so-called pre-contractual relationship arises between the parties. Even though a Term Sheet cannot compel the conclusion of the final agreement, the parties are obliged to work towards its conclusion, to avoid causing harm to the counterparty, and to provide accurate information. Negotiations may not be terminated arbitrarily. If they are, claims may arise under the general principles of pre-contractual liability under the Turkish Civil Code.

How detailed should a Term Sheet be?

Parties often prefer that the drafting of a Term Sheet should not be overly time-consuming, as a full contract—where every clause is carefully negotiated—will follow.

Nevertheless, a more detailed Term Sheet can be helpful in clarifying the transaction framework and shared objectives. This reduces the risk of future discrepancies in financial and business expectations, which could otherwise jeopardize the deal. It should also be noted that a Term Sheet may have both direct and indirect binding effects, which is why careful drafting is essential.

There is no “one-size-fits-all” approach. Whether a Term Sheet should be concise or more comprehensive depends on the specific circumstances and interests of the parties involved.

Conclusion & Support from GEMS Schindhelm

A Term Sheet provides the structural and substantive basis for a contract yet to be concluded. Although not mandatory, it has proven particularly useful in complex and long-term corporate transactions, financing rounds, and also in the context of start-up establishments.

It should be emphasized once again that a Term Sheet is not a substitute for the final contract but does entail a certain degree of binding effect. Accordingly, the conclusion of a term sheet requires a rational and well-considered approach. Each contracting party should be clear in advance which points must be included. Seeking legal advice and consult a law firm before signing a Term Sheet is highly recommended.

At GEMS Schindhelm, we are happy to support you in this and subsequent stages of your transaction. Please feel free to contact us directly.

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