A term sheet is usually the first document in which a founder and an investor set out the basic terms of a planned round. Valuation, investment size, liquidation preference and corporate governance rules attract the most attention – and rightly so.
However, signing a term sheet does not yet mean the investment will happen. The parties typically still face due diligence, the investor’s internal approvals, negotiation of the full documentation and satisfaction of the closing conditions.
At the same time, some provisions of a term sheet take effect immediately. For example, the founder may undertake not to talk to other investors for several dozen days, the company may assume an obligation to cover certain transaction costs, and both parties may be bound by confidentiality.
That is why, before signing a term sheet, it is worth looking not only at the economics of the future investment, but also at what the parties are committing to today – and how much freedom they retain if the transaction ultimately does not go ahead.
What does “non-binding” actually mean?
A term sheet almost always contains a sentence along the lines of:
“This term sheet is non-binding… except as set forth below.”
This caveat is important, but it is easy to draw too broad a conclusion from it. “Non-binding” means neither “irrelevant” nor “we can renegotiate everything later”.
In practice, a term sheet operates on three levels at once.
- First – no obligation to close the transaction. Agreeing on valuation, liquidation preference, anti-dilution or the composition of the company’s governing bodies does not yet mean that the investor must invest or that the company must accept the financing.
- Second – immediate process obligations. Exclusivity, confidentiality, costs, governing law or other expressly identified provisions may be binding from the moment of signing – even if the investment never happens.
- Third – negotiating significance. The non-binding economic and corporate terms become the starting point for drafting the transaction documents. They can be changed later, but reopening them is not neutral from a negotiating standpoint.
So the right question is not “is the term sheet binding?”, but rather:
“Which provisions are legally binding, which constitute an agreed starting point for the further documentation, and what options does each party retain until closing?”
The “non-binding” label alone is not enough
Polish law does not recognise a separate type of contract called a “term sheet”. The effects of the document are determined primarily by its content, not by the title on its first page.
The parties may therefore include in a single term sheet both non-binding assumptions for a future transaction and separate, fully binding obligations – for example, regarding confidentiality or negotiating exclusivity.
The wording of the non-binding part itself also matters. If the parties intend to retain freedom as to closing, the term sheet should state clearly that – apart from expressly designated provisions – it does not create an obligation to make the investment or to enter into definitive agreements.
It is also worth being careful with overly categorical wording such as:
“the parties undertake to enter into an investment agreement on the following terms”
– if that is precisely the effect the parties do not want to achieve.
At the same time, the absence of a contractual obligation to close the transaction does not give complete freedom in how negotiations are conducted. The law protects parties against negotiating contrary to good practice (dobre obyczaje), in particular against conducting talks with no genuine intention of concluding an agreement.
This does not, of course, mean that an investor or founder is liable merely because they walk away from the transaction after negotiating. Walking away from a deal is one thing; conducting the process in bad faith is another.
Exclusivity – the real price of giving up optionality
Exclusivity, or a no-shop, is usually the most economically significant of the binding provisions of a term sheet.
Once it is signed, the founder may lose the ability to run a process with other investors. Meanwhile, the investor is still under no obligation to close the round – it can withdraw if the due diligence results do not convince it, the investment committee does not approve the transaction, the documentation cannot be agreed, or other closing conditions are not met.
This creates a natural asymmetry.
The founder gives up, for a period of time, the ability to test the market. The investor retains the ability to walk away from the transaction if DD does not confirm its assumptions or the documentation cannot be agreed.
This asymmetry is not a problem in itself. The investor commits time, a team and advisers, and does not want to fund a process that the founder will use merely to obtain a better offer from a competing fund.
It is, however, necessary to decide consciously how much optionality the founder is giving up and what they get in return.
- Scope of transactions. Does the restriction cover only competing financing, or also a sale of the company, a disposal of material assets or other strategic transactions?
- Scope of conduct. No solicitation is not the same as a full no-talk. It is worth settling whether the founder may respond to an inquiry from another investor and what they should do with conversations that began before the term sheet was signed.
- A hard end date. 30–60 days may be a reasonable period, but what matters more is whether exclusivity expires automatically on a specific date and whether extending it requires the consent of both parties.
- An exit when the investor stops proceeding. The founder should not remain bound by the exclusivity clause after the investor has indicated that it does not intend to proceed with the transaction. The exclusivity period can also be tied to a specific timetable for DD and documentation.
- Sanctions. A break fee or cost reimbursement should be predictable and proportionate. A distinction should also be drawn between the transaction simply not being concluded and an actual breach of exclusivity.
In practice, 45 days of exclusivity with an investor who completes DD quickly and delivers first drafts of the documentation may be less risky than 30 days with an investor who retains full freedom to drag out the process and change the terms.
Confidentiality – what exactly is confidential?
In a VC round, confidentiality usually has at least two subjects.
The first is the transaction itself – the fact that talks are taking place, the valuation, the structure of the round and the other terms of the term sheet.
The second is the information provided in due diligence – financial data, the cap table, information about customers, technology, strategy and product plans.
These two categories are not always covered by the same document. The parties may have signed an NDA earlier, and the term sheet may contain its own, additional confidentiality clause.
A good clause should answer at least a few questions.
- What exactly is confidential? Only the term sheet and its existence, or also data room materials, conversations with management, customer information, technology and materials prepared by advisers?
- Who may receive the information? The company may need to disclose information to existing investors and advisers. The fund – to its investment committee, advisers, co-investors or other persons within its structure.
- For what purpose may the information be used? A ban on disclosure alone is different from a ban on using the information for other purposes. This is particularly important where the fund is also analysing or financing competing companies.
- Which document takes precedence? If an NDA was signed earlier, the term sheet should state whether it supplements it, amends it or leaves it unchanged. Two partially conflicting confidentiality regimes are worse than one well-drafted one.
- What happens if the transaction falls through? Confidentiality should usually survive the end of talks for a specified period. It is also worth agreeing rules for returning or deleting materials, and exceptions for archive copies required by law or internal regulations.
Costs – a cap is only the beginning
The costs of lawyers and other advisers may look like a detail compared with valuation or liquidation preference.
For the company, however – especially at an earlier stage – this can be a real expense.
There is no single universal rule that in VC “everyone pays their own way”. In many rounds, the company agrees to cover the lead investor’s reasonable legal costs, most often up to a specified limit. In other transactions, each party does indeed bear its own costs.
What matters, then, is the specific mechanics, not whether a given solution is labelled “market standard”.
If the company is to reimburse the investor’s costs, a cap alone is not enough.
It is worth settling:
- Which costs count towards the limit? Only external lawyers, or also tax, financial DD and other advisers?
- When does the payment obligation arise? The founder-friendly solution is reimbursement at closing. If costs are also to be payable if the transaction falls through, the situations in which this applies must be clearly specified.
- Who bears the cost if the investor withdraws? A situation in which DD reveals a serious problem in the company is different from one in which the investor simply changes its mind.
- Does the cost reimbursement in practice work like a break fee? If the founder has to pay a significant amount merely because the transaction was not concluded, the economic effect of such a clause may be much broader than ordinary cost reimbursement.
In practice, more important than the question:
“Does the company pay the investor’s costs?”
is the question:
“How much at most, for what, and in which scenario will we pay if the round does not close?”
Governing law and dispute resolution – a short clause with real consequences
If the provisions on exclusivity, confidentiality or costs are binding, you also need to know under which law they will be assessed and where their performance can be enforced.
In a cross-border transaction, this is not merely a technical detail. Different legal systems may take different approaches to pre-contractual documents and to obligations relating to the conduct of negotiations.
The law governing the term sheet does not have to be the same as the law governing the subsequent investment documentation, but any such divergence should be deliberate.
The choice of dispute resolution method is a separate decision.
Choosing Polish law does not automatically mean that a dispute will be resolved before a Polish court.
“Non-binding” does not mean “we’ll revisit everything in the transaction documents”
This is the second – more negotiating than legal – pitfall of a term sheet.
One of its basic purposes is to limit the number of fundamental discussions at the stage of drafting the transaction documents.
If the parties have agreed on the valuation, a 1x non-participating liquidation preference, a specific composition of the company’s governing bodies and basic veto rights, the transaction documents should, as a rule, reflect those assumptions.
“Non-binding” should not serve as a justification for introducing new economic terms or additional control rights only once the founder has already granted exclusivity and the process is well advanced.
This does not, of course, mean that the terms can never be changed.
Due diligence may reveal a problem the investor was not aware of when the term sheet was signed. The company’s situation, the size of the round or its structure may change.
There is, however, a difference between a justified change of terms resulting from new information and an attempt to improve one’s negotiating position only after the founder has already granted exclusivity.
For the same reason, the founder should be wary of leaving material issues under terms such as:
- “customary”,
- “standard”,
- “usual investor protections”,
- “to be agreed”.
The more topics that genuinely affect the economics of the transaction or control rights are deferred to the transaction documents, the less the term sheet actually decides – even though its binding provisions may already be in effect.