Investment term sheets: which promises bind before the round closes?
A term sheet may describe a largely non-binding investment proposal while making particular clauses binding. Read the wording and structure carefully. Exclusivity, confidentiality and costs can affect the company before any investment money arrives.
Mark the binding commitments clearly
Identify the parties, governing law, intended legal effect and which provisions are binding. Do not rely on the document title. A statement that the investment is subject to definitive documents should be read alongside clauses that expressly create immediate obligations.
Review exclusivity duration, permitted discussions, confidentiality and responsibility for advisers' costs. Decide what happens if diligence takes longer than expected or the investor changes its proposal. A founder may otherwise stop speaking to alternatives while remaining uncertain whether the round will complete.
Model economics and control together
Valuation is only one part of the bargain. Review liquidation preference, option-pool treatment, anti-dilution, board composition, reserved matters, founder vesting and transfer rights. Some terms affect sale proceeds; others affect daily decision making or future financing flexibility.
Example: Two offers have the same headline valuation, but one includes a larger pre-investment option pool and a stronger preference on sale. The founder's eventual economic outcome may differ materially. Build a cap-table and exit-proceeds model rather than comparing only the valuation printed at the top.
Use the term sheet to guide implementation
Prepare a list of definitive documents, approvals, conditions and filings. New articles, subscription and shareholders' agreements should implement the agreed deal consistently. Identify warranties, disclosure requirements and any new obligations introduced during drafting.
Tax reliefs, regulated activities and national-security screening may need specialist consideration depending on the company and investor. Do not promise eligibility from a template. Maintain a clear closing checklist and confirm receipt of funds and completion conditions before treating the investment as finished. This guide addresses England and Wales; international investors may introduce additional rules.
Your next steps
- Highlight every clause intended to bind before completion.
- Compare dilution, preferences and governance as well as valuation.
- Translate the agreed terms into consistent documents, approvals and a closing checklist.
Sources and scope
General legal information. The contract, applicable jurisdiction and particular facts can change the outcome. This guide does not replace advice on your individual circumstances.