Startup term sheets: what binds before the investment closes?

A founder signs a term sheet with a fund. It sets the valuation, investment amount, main investor rights and 60 days of exclusivity. The first page calls the document non-binding.

The founder assumes they can keep talking to other investors. The fund believes it has secured a binding no-shop, starts due diligence and instructs advisers. A few weeks later, it sends the startup a bill for part of the work. The round never closes.

The term sheet should explain who can walk away, which conversations are restricted and who pays before the expensive part of the process starts. Which provisions are enforceable depends on the wording and governing law. The negotiation-liability and corporate-document examples below use Polish law.

What you will learn

In brief

• The document’s wording and the parties’ actual agreement matter more than the label.
• Confidentiality, exclusivity, costs, governing law and rules for ending discussions may take effect on signature.
• Valuation, investment amount and investor rights usually outline the proposed deal, unless the document gives them a different effect.
• Signing a term sheet usually does not guarantee that the investment will close.
• Identify the binding clauses expressly and state that the remaining provisions do not oblige either party to complete the transaction.

What does a startup term sheet cover?

A term sheet records the main assumptions of a proposed investment before the parties prepare the full documentation. It helps them check whether they agree on the economics, investor rights and process before paying for due diligence, the investigation of the company and its risks.

It can cover:

• Investment amount, structure and pre-money or post-money valuation.
• The cap table and an employee equity pool, often called an ESOP.
• Liquidation preference, protection against price dilution and participation in later rounds.
• Decisions requiring investor consent, information rights and board participation.
• Conditions to closing and the timetable for further negotiations.
• Due diligence, confidentiality, exclusivity and costs.

The document does not replace an investment agreement, shareholders agreement, amendments to the articles of association or the steps needed to issue shares. In a Polish company, the articles of association are the corporate document called umowa spółki. They have a different function from a private agreement between shareholders.

Even a non-binding economic provision can make later negotiations difficult. Once both sides have announced a valuation internally, changing it may be commercially expensive without being a breach of a legal obligation.

Can a term sheet be partly binding?

Yes. A term sheet can leave the investment itself open while binding the parties on confidentiality, exclusivity or costs. Read each provision and check that the overall wording supports that distinction.

A typical division is:

• Valuation, investment and investor rights: proposed deal terms, usually subject to further agreement.
• Closing conditions: events that must occur before the transaction proceeds.
• Confidentiality: protection of information from the start of discussions or signature.
• Exclusivity: a temporary restriction on specified competing discussions or transactions.
• Costs: an agreed allocation of process expenses.
• Governing law and disputes: rules for the term sheet itself.
• Timetable: indicative or binding, depending on the language used.

A sentence saying that the whole document is non-binding may conflict with later promises to keep information confidential or stop other fundraising discussions. List the binding clauses by number. Then explain that the other clauses describe a proposed round and do not create an obligation to close it.

A non-binding term sheet can contain a binding no-shop. The clause needs to say what the parties must do and when that obligation ends.

Does signing guarantee the investment?

Usually it does not. Closing may depend on satisfactory due diligence, investment committee approval, agreed documents and other conditions. If the investor is meant to commit once specified conditions are met, that commitment needs clear wording.

Common conditions include:

• An acceptable due diligence outcome and investment committee approval.
• Agreement on the investment and shareholders agreements.
• Clear ownership of code, the brand and other product assets.
• Corporate approvals and changes to the articles of association.
• No material adverse change.
• Completion of missing financial or tax records.

An investor promising to invest “if satisfied with the company” retains considerable discretion. The startup needs to understand the review’s scope, decision process, deadlines and the kinds of findings that could stop the round. Agree whether the company can explain or remedy those findings.

Check the verbs as well as the headings. “Undertakes to subscribe” and “intends to subscribe, subject to agreed documentation” can support different arguments about what has already been promised.

How should exclusivity and no-shop work?

A no-shop temporarily restricts the startup’s ability to seek or pursue a competing transaction. It can protect a fund spending money on the review, but it also reduces the startup’s financing options. Connect the restriction with a process the fund is expected to progress.

Settle:

• Whether it covers a new funding round, a sale of the company or both.
• How it treats discussions already underway and unsolicited approaches.
• Whether it prohibits seeking offers, responding to them or both.
• Which obligations bind the company, founders and advisers.
• The precise start and end dates, and any requirement to stop existing discussions.
• Early expiry if the fund delays or abandons the process.
• The consequences of breach.

Sixty days can be reasonable in an organised process. The same restriction is harder to accept if the investor has no deadline to begin due diligence, ask questions or deliver draft documents. The fund does not necessarily need an identical restriction, but the startup should have milestones and a route out if they are missed.

Avoid automatic extensions or exclusivity “until negotiations finish” without a defined end point. Use a date and a clear process for agreeing an extension.

Who pays for due diligence and legal documents?

The parties can pay their own advisers, agree reimbursement after closing or allocate specified expenses up to a cap. They can also make the allocation depend on why the process ends. The term sheet needs to identify the chosen model.

An obligation to reimburse “all investor costs” leaves the startup with little control. Define the cap and VAT treatment, covered work, approval of additional expenses, supporting invoices and payment date. Explain what happens if either side walks away.

If costs are deducted from the round, show the cash actually reaching the company. A PLN 3 million investment with investor costs of up to PLN 120,000 affects runway. Include the net proceeds in the financial model rather than treating the deduction as an administrative detail.

What should confidentiality protect?

Protect information shared in pitches, due diligence and negotiations, regardless of format. At the same time, a fund may need to share it with advisers, group entities and its investment committee. Define permitted recipients and the protections and responsibility attached to that disclosure.

The NDA or confidentiality section should explain:

• What is confidential and the permitted purpose of use.
• Who may receive it and under what obligations.
• Personal data safeguards and data room access.
• Return, deletion and any copies retained because the law requires them.
• Duration, exceptions and confidentiality of the negotiations themselves.

Code, architecture, the roadmap, customer contracts, forecasts and round terms can all be sensitive. Full repository access is rarely necessary at the beginning of a review. Access can be staged, limited to named people and logged.

Can either side end negotiations without liability?

Whether ending discussions creates liability depends on the governing law, agreed obligations and circumstances. The investor may discover a problem; the startup may reject the final documents; the investment committee may decline the deal.

Under Article 72 of the Polish Civil Code, negotiations conducted contrary to good practice, particularly without an intention to conclude the agreement, can lead to liability for loss suffered through reliance on the negotiations. That is different from an automatic right to the profit expected from the investment.

Examples requiring closer assessment include negotiations used solely to obtain product information, continuing a costly review after deciding to withdraw, or deliberately extending exclusivity to block competing finance. A genuine change of position after new findings is not automatically bad faith.

Separately, breaching a binding no-shop, confidentiality obligation or cost arrangement may create claims under the term sheet. Distinguish the freedom not to invest from the obligations that apply while the parties are discussing the deal.

How do the documents fit together?

The term sheet outlines the deal and process. An NDA protects information; a negotiation agreement can govern discussions, exclusivity and costs. Under Polish law, a preliminary agreement may commit the parties to enter a defined future agreement. The investment agreement sets the investment and closing steps, while the shareholders agreement governs the longer-term relationship. The articles of association govern the company’s corporate arrangements.

These functions do not always need separate documents. Binding confidentiality and exclusivity can sit in the term sheet if their effect is clearly distinguished from the proposed economics. A detailed term sheet using firm commitments should be reviewed for the legal function it actually performs.

Check the founders’ arrangements before agreeing the round. Our guide to a founders agreement before incorporation explains the starting point. Vesting and IP ownership before due diligence can also become closing conditions.

A hypothetical case: a non-binding round and 60 binding days

This Polish-law example is illustrative, not a client history. A startup receives a term sheet proposing a PLN 3 million investment at a PLN 12 million pre-money valuation, a 1x non-participating liquidation preference and a 10% employee pool created before the round. It also includes 60 days of exclusivity, due diligence costs up to PLN 120,000 and a general non-binding statement.

After three weeks, another investor offers a higher valuation and faster closing. The startup begins discussions. The first fund demands that they stop, claims PLN 94,000 in costs and asks for a penalty for breaching exclusivity.

The document does not identify the binding clauses, address unsolicited offers, explain early expiry or set due diligence milestones. It does not settle reimbursement if the investor withdraws. It contains no contractual penalty clause, so the fund cannot derive that penalty solely from its own expectation. Other claims still require assessment of the wording and circumstances.

A clearer document would identify the binding obligations, define the no-shop, fix a 60-day end date and provide early expiry for fund delay. It would also set review milestones, evidence and limits for costs, withdrawal rules and the consequences of breach.

The founders should model the actual cap table too. A PLN 12 million pre-money valuation and PLN 3 million investment do not show the whole result when a 10% employee pool is created before the round.

Before you sign

A useful term sheet reduces uncertainty during the process even when it does not guarantee the round. Read it once as the map of a future investment and again as the agreement that will govern the next few weeks.

For help negotiating a Polish startup round or aligning the term sheet with corporate documents, see our startup legal services or discuss the proposed terms with us.

Sources and further reading

• Kodeks cywilny, the Polish Civil Code, including negotiation rules in Article 72 and preliminary agreements in Articles 389 and 390. Official text in Polish.