A term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.
A term sheet lays the groundwork for ensuring that the parties involved in a business transaction agree on most major aspects of the deal, thereby precluding the possibility of a misunderstanding and lessening the likelihood of unnecessary disputes. It also ensures that expensive legal charges involved in drawing up a binding agreement or contract are not incurred prematurely.
Term sheets are not generally considered legally binding and are therefore seen as unenforceable in a legal sense. In that regard, a term sheet may seem similar to a letter of intent when the action is predominately one-sided, as in acquisitions, or a working document to serve as a jumping-off point for more intensive negotiations.