Binding effect and design of term sheets for startup investments

Legal status of term sheets and LOIs under German/European law

A term sheet (often referred to as a letter of intent (LOI) or letter of intent) is generally not legally binding. It documents the key points of a planned investment or transaction without already representing the final contract. In particular, a term sheet does not constitute a claim to the conclusion of the final investment agreement. It does not automatically create an obligation for the parties to carry out the investment, nor can the exact conditions be enforced as long as no final contract has been signed.

However, the commencement of negotiations already creates a pre-contractual obligation under German law (cf. § Section 311 (2) BGB ). This means that both parties are obliged to show consideration during negotiations and to act in good faith (see Section 242 BGB). If one party abruptly breaks off the talks without good reason or acts in breach of good faith, this may result in a liability for damages. This compensation for damages from culpa in contrahendo (§§ 311 Para. 2, 241 Para. 2, 280 para.1 BGB ) typically covers the legitimate interest (so-called negative interest) – i.e. expenses incurred by the other party in justified reliance on the conclusion of the contract. In practice, however, the hurdle for this is high: only if the conclusion of the contract was already considered certain for the other party and the other party has incurred measurable expenses in reliance on this, can compensation for these expenses be demanded in the event of a breach of contract. Case law (e.g. BGH, NJW 1996, 1884) often requires an intentional breach of the negotiating obligations for liability to apply. In many cases, “break-offs” of negotiations therefore remain without legal consequences, provided they do not violate good faith. Nevertheless, all parties involved are aware that deliberate deception or termination without cause entails considerable risks – both legal and reputational.

Important: Term sheets and LOIs are not expressly regulated by law, neither in Germany nor at European level. Their legal classification is based on general contractual principles. In continental European legal systems (such as Germany, France, etc.), a pre-contractual duty of loyalty usually applies; in common-law jurisdictions (e.g. England, USA), express “subject to contract” clauses tend to ensure that no unintended contract arises. European uniform law does not exist directly in this regard – however, French law (Art. 1112 Code civil) or the UNIDROIT Principles, for example, show similar principles: Negotiating parties must act in good faith and not jump ship without cause. Overall, however, it remains the case that a correctly formulated term sheet does not create an enforceable obligation to conclude the main contract – unless the parties expressly want this (in which case it is referred to as a preliminary contract).

Preliminary contract: If a letter of intent already contains all essential contractual points and a clear commitment to conclude the contract at a later date, it can be considered a preliminary contract. A preliminary contract is legally binding and obliges the parties to conclude the main contract on the agreed terms as soon as the agreed conditions are met. The parties must therefore be careful: Even without the word “preliminary agreement”, a very detailed term sheet can be interpreted as a binding agreement if there is a recognizable intention to be legally bound. It is therefore advisable to expressly state in the document that it is a non-binding declaration of intent, that it does not constitute a claim to the conclusion of the investment and that deviations are possible at any time. Clear wording (“this term sheet is not legally binding unless explicitly stated otherwise”) can be used to control the binding effect. However, if such clarifications are forgotten or if the content is already as specific as a contract, the risk increases that a court will later assume a binding effect. In practice, LOIs in Germany are often drafted as “soft” LOIs – i.e. non-binding on the main points – while “hard” LOIs should be treated with caution, as they can in fact constitute a preliminary agreement if the main points are specific and both parties have signed them.

To summarize: In principle, term sheets/LOIs are not legally binding with regard to the conclusion of a contract. They serve as a declaration of intent and negotiation protocol. Nevertheless, certain clauses in them can be binding (see section 2) and there are pre-contractual obligations. In addition, term sheets often create a psychological bond – the parties involved regard it as a “handshake” and feel morally bound to continue working within this framework. Throughout Europe, the principle of good faith applies in business transactions, meaning that a term sheet, despite being formally non-binding, establishes trust and certain obligations in dealings with one another. Startups should be aware of this and not dismiss LOIs as mere “paper tigers”.

Typical binding and non-binding clauses in the term sheet

A term sheet contains a mixture of binding and non-binding clauses. It is common for there to be a clause at the beginning or end that clarifies which parts are to be legally binding and which are not. Most core commercial issues (investment amount, valuation, rights of the parties, etc.) are not binding – they are “subject to” the final contract. Some issues, on the other hand, are regularly agreed as binding, even in the context of an otherwise non-binding document. Here are the typical categories:

Binding clauses (examples):

• Non-disclosure agreement (NDA): Term sheets almost always contain a confidentiality agreement. Both parties undertake not to disclose confidential information from the negotiations and due diligence material to third parties. This confidentiality clause is legally binding and in the event of a breach, there is a risk of injunctive relief and claims for damages. A contractual penalty is also often agreed in order to effectively enforce the NDA.
• Exclusivity / no-shop: Investors often demand an exclusivity clause according to which the startup is not allowed to negotiate with other potential investors for a certain period of time. This is intended to protect the investor so that they can invest time and money in due diligence and contract negotiations without having to fear competition. Such no-shop rules are common and binding. They are limited in time (e.g. 2-3 months from signing the term sheet) and mean that founders are not allowed to solicit new offers during this time. If a founder violates this, this can trigger claims for damages. Start-ups should therefore ensure that the exclusivity period is as short as possible and take their own financing situation into account – too long an exclusivity period can be dangerous if the investor backs out after all.
• Assumption of costs / reimbursement of expenses: The term sheet often contains provisions on who bears the transaction costs. For example, it can be agreed that each party pays its own costs (legal advice, auditing costs, etc.). However, investors often want the startup to bear certain costs – such as the investor’s legal fees up to a cap amount, especially if the financing is successfully completed. Sometimes a cost provision is also made in the event of failure: e.g. a break-up fee or expense reimbursement clause. This means that if the deal does not materialize despite the term sheet, one party must reimburse the other for the expenses incurred, depending on the cause. Typically, investors ensure that the startup bears at least part of the investor’s due diligence or legal advice costs if the startup withdraws. Conversely, it is sometimes agreed that the investor will pay a lump sum to the startup (break-up fee) if it withdraws without cause despite having signed a letter of intent – this is intended to give the startup financial breathing space to quickly look for new investors. Cost and break-up clauses are binding and very important: they create financial compensation and increase the “seriousness” of the term sheet. Startups should check exactly what costs they may incur.
• Applicable law and place of jurisdiction: Term sheets often specify which law is to be applied (in the case of purely German parties, this is usually German law) and which court is to have jurisdiction in the event of a dispute. These clauses are legally binding. Particularly in cross-border constellations (e.g. foreign VC), it is important to agree the applicable law and, if applicable, arbitration jurisdiction in the term sheet.
• Exclusivity of further points: In some cases, further specific commitments are made binding – e.g. that the founding team will not make any significant disadvantageous changes until closing or will not exceed certain milestones in the meantime. No-hire/non-solicitation clauses can also be agreed as binding. However, such additional binding agreements are more common in larger transactions or M&A LOIs; in the case of early-stage start-ups, the binding clauses are usually limited to the aforementioned key points (NDA, no-shop, costs).

Non-binding regulations (examples):

• Investment conditions: The amount of the investment, the planned company valuation (pre-money/post-money), the investor’s participation quota and most of the key economic points (e.g. liquidation preference, dividend rights, anti-dilution protection, voting rights) are recorded as non-binding key points. They define the current state of negotiations and the mutual intentions, but in case of doubt they are “subject to contract”, i.e. not legally enforceable as long as no final contract exists. This means that neither party can tie the other down to these conditions – there is still room for changes until the signing.
• Planned contract structure: The term sheet often lists which contracts are intended (e.g. shareholders’ agreement, investment or share purchase agreement, new articles of association) and which transaction structure is selected (capital increase, convertible loan, direct share purchase, etc.). This information is non-binding; it serves the purpose of coordination, but the detailed concept is only created in the course of the contract documentation.
• Timetable and process: Agreements on the further course of events – for example that due diligence will begin within X weeks, the share purchase agreement will be drafted within Y weeks, or a targeted closing date – are generally non-binding plans. They are intended to structure the transaction in terms of time, but are not fixed deadlines with a legal claim. (However: unrealistic delays could in turn violate good faith, see above, but this is outside the direct term sheet claim).
• Further framework conditions: Many conditions of a future collaboration are outlined: e.g. milestones for staggered payouts, planned exit strategies, ideas on management participation (ESOP), future governance (board seats, veto rights), vesting rules for founder shares, drag-along/tag-along agreements, etc. These points are essential to understanding the deal. These points are essential for understanding the deal and are negotiated in detail – however, they are included in the term sheet subject to finalization. They are therefore to be understood as declarations of intent.

This is important: It should be clearly recognizable in the term sheet which clauses are binding. It is good practice to explicitly mark these passages (e.g. with an asterisk and the word“binding“). Anything that is not marked as binding is considered non-binding. Nevertheless, founders should take all content very seriously – more on this below. The non-binding points often de facto determine the guard rails of the final contract.

In summary, the following are typically binding: confidentiality, exclusivity, reimbursement of costs/expenses, choice of law/jurisdiction (and possibly some other explicitly named points). The other commercial deal terms are not binding (but highly relevant): Valuation, investment amount, participation rights, company valuation, liquidation preference, anti-dilution, vesting, exit clauses, etc. They only become finally binding when the investment agreement is signed.

Stumbling blocks: Level of detail, wording and unintended binding effect

“A contract is quickly concluded without you wanting it to be ” – this danger exists if a term sheet is formulated carelessly or is too detailed. The main pitfall is a commitment that goes too far and that neither the founder nor the investor intends. The following aspects deserve particular attention:

• Regulations that are too detailed: A term sheet should cover the essential points, but not every little detail. If it is too detailed and covers all important parts of the contract in detail, there is a risk that a court will consider this to be a final agreement. It is particularly tricky if formulations such as “the parties agree on…” are used and no reservations are formulated. Example: If the LOI sets out the purchase price, the subject matter, all conditions and the timetable and at the end it says “the parties undertake to conclude the contract by date X”, this could already be an enforceable preliminary agreement. Tip: Deliberately leave it open that detailed negotiations will follow, and possibly write that points “will be agreed in the final contract”.
• Unclear or contradictory wording: Vagueness can be equally problematic. If the term sheet speaks of “non-binding intention” on the one hand, but elsewhere uses formulations such as “is binding” or “the parties will… do” without reservation, ambiguity arises. Such contradictions can later lead to conflicts of interpretation: Was it binding or not? In case of doubt, a judge will give more weight to the more specific statement than to a general disclaimer. Therefore, the language should be consistent. Areas that are not intended to be binding should preferably be formulated in the subjunctive or as an intention (“intend…”) rather than in the indicative (“will…”). And vice versa: clearly identify areas that are intended to be binding (e.g. “The following paragraphs X and Y are legally binding”).
• Missing non-binding note: It happens again and again that there is no explicit reference to the non-binding nature of the term sheet. In the heat of the moment, perhaps everything is listed and you sign – but forget a sentence such as “This term sheet is not legally binding (with the exception of the clauses marked as binding).” If such a note is missing, the intention to be legally bound must still be examined from the circumstances, but the risk increases that a detailed document in particular will be classified as binding. Therefore: always make it clear that there is no entitlement to the conclusion of the main contract. In practice, standard clauses are often used, e.g: “The parties agree that this document is merely a declaration of intent and does not constitute a legal obligation to conclude a contract.”
• “Signing at the notary” trap: A concrete pitfall is to specify a time or date for signing the contract in the LOI without also stating that no binding contract has yet been signed. Example: “The parties have successfully concluded the negotiations and intend to sign the investment agreement before notary XY by November 30 at the latest.” – If one party invests by the end of November (e.g. the investor orders expert opinions, the startup rejects other offers) and the other party cancels, the former could argue that a firm agreement had already been reached. In this case, there is a risk of liability for abandonment: the party that withdraws for no reason may have to pay compensation. This case can be avoided by clearly stating that there is no obligation to conclude a contract until the notarization. So always use the language of intent (“intend to sign” instead of “will sign”) and add that the final signing depends on satisfactory due diligence, committee approval, etc. Otherwise, an intention quickly becomes a commitment. Otherwise, an intention quickly becomes an obligation.
• Secondary obligations and trust: Even if the term sheet as such is non-binding, protective obligations arise. Pitfall: One party behaves disloyally, e.g. negotiates in parallel with third parties despite exclusivity or discloses confidential information. Such breaches can result in damages, even though no main contract has been concluded. Founders should be aware that, for example, deliberately stalling an investor – e.g. to stall for time or tease out a better offer – can make them liable for damages if the investor has relied on this. Conversely, this also applies to investors who only investigate a startup and then jump ship for no reason. Pre-contractual liability applies here. Although this point is not a “contractual” stumbling block in the term sheet text itself, it is a practical risk: you should only sign a term sheet if you really intend to close the deal. Fake talks or tactical exploitation of your negotiating position are dangerous.
• Psychological commitment: An often underestimated factor – and therefore also a stumbling block – is the actual binding effect of a written term sheet. Even if it states that everything is non-binding, the signing of a document establishes a certain finality in people’s minds. Deviations in later contracts are seen as a breach of trust unless they can be well justified. Founders report that investors are very reluctant to deviate from points agreed in the term sheet – and vice versa. You “stand by your word”, also morally. Therefore, a prematurely accepted term sheet point can hardly be revised later (“but you already agreed…”). The trap here: As a founder, perhaps rashly agreeing to something (because you think “it’s not binding yet, I can change it later”). The opposite is the case: What is in the term sheet is difficult to negotiate out of later. Even if there is no legal claim, it massively weakens your own negotiating position if you later want to unilaterally deviate from what was agreed in the term sheet. The other side will at least demand an explanation – or suffer a loss of trust, which can jeopardize the deal. Lesson learned: Only agree in the term sheet what you can also accept in the final contract! The supposedly non-binding nature of the agreement should not lull you into a false sense of security.
• Milestone tranches: A practical example of potential problems is agreeing details of milestones too early. Sometimes investors want to tie their investment in tranches to certain milestones. A term sheet should only include such milestone agreements with caution. Why? Experience shows: “Who decides whether a milestone has been reached?” – This question is difficult and offers potential for conflict. If, for example, it is agreed that the second tranche will only be paid if key figure X is reached by date Y, this is often unclear from a legal and factual point of view. Founders could become entangled in endless discussions as a result – while the investor may have already received his shares in full (especially in the case of capital increases, the shares are issued immediately, but money comes in tranches). Experts therefore often advise: use milestone financing very carefully and avoid it in the term sheet unless it is absolutely necessary. It is uncommon in seed rounds to have complex milestone plans in early term sheets – and if they do, they should be clearly measurable and fair.

To summarize: The biggest pitfalls are ambiguity and excess. Prevention: Always clearly state what is not binding; do not overload the term sheet – only regulate the key points, not every paragraph of the contract. At the same time, at least address all key deal-breaker topics (so as not to raise false expectations). Founders should know that a seemingly non-binding agreement is in fact much more binding than you think. The term sheet must therefore be carefully negotiated and formulated in order to avoid any nasty surprises later on.

From term sheet to investment agreement: process, signing/closing and best practices

Once the term sheet has been signed, the next phase begins: due diligence and contract drafting. This is how the process typically works for early-stage investments:

• Due diligence: After the term sheet, the investor carries out a detailed examination of the startup – legal, financial, technical, depending on the focus. The term sheet often already states that the investor will be given access to documents and what type of due diligence is planned. This review phase serves to verify the assumptions in the term sheet. It is usually agreed (albeit non-binding) that significant negative findings can influence the negotiations. In practical terms, this means that if the investor finds major deviations or risks, he could demand renegotiations or, in extreme cases, pull out. For this reason, it is sometimes written in the term sheet that the investment is “subject to satisfactory due diligence”.
• Preparation of the final contracts: In parallel or subsequently, the investor’s lawyer (or the one leading the round) usually drafts the investment agreement and other documents. In classic equity deals, this often includes: an investment or subscription agreement (regulates who gives how much capital in return for shares), a shareholders ‘ agreement (regulates the ongoing rights/obligations between the founder and investor: e.g. veto rights, drag/tag, vesting, etc.), and often also an amendment to the articles of association (new articles of association, e.g. in the case of a GmbH with new shares and new rights). All these documents together form the “participation set”. A good transition from the term sheet is that the term sheet serves as an outline: many investors use standard templates that cover all points anyway and adapt them according to the terms agreed in the term sheet. In practice, the term sheet is often given to the law firm with the instruction: “Please pour into contract.”
• Consistency of rules and regulations: Best practice is for the final contracts to be consistent with the key points set out in the term sheet. The term sheet is therefore a checklist for the lawyers: every important clause (pre-emption rights, liquidation preference, board seat, etc.) should be included somewhere in the contracts. Conversely, what is not mentioned in the term sheet is often not renegotiated later, unless it concerns standard clauses that both parties assume are known (e.g. certain guarantees). It is rare for completely new economic points to be introduced at a later date – this would create a great deal of mistrust. This is why experienced lawyers recommend: “What is not in the term sheet is usually not in the contract – and what is there, stays there.” Both parties should therefore make sure that all important points are already clarified in the term sheet. Smaller legal details (such as precise definitions, procedures for exercising rights, etc.) are of course only worked out in the contract, but the basic decision is made in the term sheet.
• Signing and closing: Signing is when the final contracts are signed. In the case of start-ups (GmbH financing), signing often takes place in front of a notary, as capital increases and share transfers require notarization. Signing means that the contract is signed in a legally binding manner, but it may contain conditions that still need to be fulfilled before the transaction actually becomes effective. The actual execution of the investment – i.e. cash flow in exchange for shares – is called closing. In the case of small investment rounds, signing and closing often take place on the same day (e.g. if everything takes effect immediately and no further action is required). For more complex deals or larger rounds, they can be separated: For example, yousign the investment agreement(signing), but make the consummation (closing) subject to certain conditions precedent. These could be: official approvals (e.g. cartel office for larger investments, which is rarely relevant for start-ups), or the fulfillment of certain requirements (e.g. that the start-up registers a certain IP by then, or that additional co-investors have made a binding commitment). In classic VC rounds, conditions tend to be minimal; for example, it is common for the condition to be “deferred” until the capital increase is entered in the commercial register – this is a formal closing step. The term sheet sometimes outlines a list of such “conditions to closing”, such as “subject to satisfactory due diligence, board approval of investor, final documentation, and no material adverse change until closing.” Such conditions are not uncommon and protect the investor in the event that something material happens between the term sheet and closing.
• Timeline and deadlines: A term sheet should provide a rough timeline outlook – e.g. “planned signing by [date] at the latest”. However, as mentioned, this is usually non-binding. Nevertheless, professional investors stick to agreed timetables as they are interested in a swift closing. Startups should pay attention to timing: Tough negotiations on the final docs can take weeks. It is important that the term sheet is not signed too early (when fundamental points are still unclear), otherwise subsequent negotiations will drag on unnecessarily. Best practice: Do not sign the term sheet until you really agree on the key commercial points – then signing/closing should ideally be feasible within ~4-8 weeks (depending on the scope of due diligence).
• Changes after the term sheet: What happens if something unexpected comes up during the due diligence or if you want to change an aspect after all? In practice, term sheets can of course be amended by mutual agreement. Both sides must agree. You would then either make an addendum to the term sheet or incorporate it directly into the draft contract (which the other party must then accept). However, major changes are rare unless there are really good reasons (e.g. the startup has significantly lower sales than assumed -> investor wants to renegotiate valuation). As term sheets often include a “no material adverse change” clause, the investor has an open door here to renegotiate or back out in the event of major negative deviations. Startups should try to present all facts openly and honestly in advance in order to avoid such situations. Then the path from term sheet to contract remains predictable.
• Consistency check: A good exercise for the final contract is a comparison with the term sheet: Do all points match? Founders should ask their lawyer for help with this. Sometimes new wording creeps into the long contract text that was not obvious in the term sheet (e.g. exact anti-dilution formula or details on liquidation preference). While such details should be in the spirit of the term sheet, vigilance is required to ensure that nothing is “amplified” or changed. In case of doubt, the consensus documented in the term sheet should be implemented – deviations must be justified and discussed with everyone, as required by an industry standard (German Term Sheet Standard).

To summarize: From term sheet to closing, you go through due diligence, contract negotiations, signing and, if necessary, closing with conditions. The term sheet is the common thread for all subsequent steps. Signing means signing the binding contracts, closing means completion (receipt of money and issue of shares). Founders should ensure that there are no uncontrollable risks between signing and closing (e.g. long periods of time or uncertain conditions). In seed rounds, it is common for signing and closing to virtually coincide (you sign and the money flows immediately or within a short period of time). For more complicated setups, there may be intermediate stages – but these should be addressed transparently in the term sheet (e.g. “Investment is subject to condition XY”).

Best practice tip: Many investors already include in the term sheet who will draft the contract documents and that both parties will work together “in good faith” to implement the content. This creates clarity and avoids endless hanging fruit. A contract closing date should also be targeted – for example, that both parties will endeavor to sign all final contracts within 4-6 weeks of signing the LOI. A soft deadline like this increases the pressure to complete the process efficiently.

Standard market developments 2024/2025 for seed investments

The venture capital sector has experienced some fluctuations in recent years – the boom in 2021 was followed by a slowdown in 2022/2023. The following trends can be observed for seed and pre-seed contracts in 2024/25:

• Slightly increased investor protection: Although early-stage deals are still often designed to be founder-friendly, investors have been more careful to include downside protection clauses in the uncertain market environment. This means you are seeing slightly more structured terms that protect the investor in case things don’t go as planned. Example: liquidation preferences >1× or even participating preference shares occasionally appear in early rounds to increase investor protection (e.g. 2× liquidation preference was negotiated more often in 2023/24 than in boom times). According to current market studies, however, such “tougher” terms are still the exception – around 90% of seed deals remain with 1× non-participating preferences. Nevertheless, the willingness to demand stricter clauses has increased somewhat in 2024, especially if the startup is in a weaker negotiating position.
• Focus on due diligence and binding commitments in this regard: In the years of oversupply of capital (2020/21), deals were sometimes concluded at lightning speed with minimal due diligence. In 2024, however, investors are once again taking more time for due diligence – even in seed rounds. As a result, due diligence clauses are becoming more important. For example, we are increasingly seeing term sheets specifying which areas are still to be examined (technology, finance, IP, etc.) and that the deal will be closed “subject to no material findings”. In some cases, the parties even agree on binding steps during the DD: for example, that the startup will clear up certain legacy issues (e.g. shareholder resolutions, IP transfers from founders to the company) before closing. Such agreements create trust on the investor side. Trend: The binding nature of some due diligence-related points has increased – for example, the startup undertakes to disclose all relevant documents truthfully, and incorrect information can be considered a breach of contract. In short, due diligence obligations are being taken more seriously; investors are ensuring that they can withdraw if something serious comes to light and startups are expected to cooperate proactively.
• Cost sharing and break-up fees: Break-up fees were discussed somewhat more prominently in 2024 in view of a number of failed deals during the market slowdown. It was more common for startups to insist on (or offer investors) a clause that compensates the startup financially if the investor drops out after an exclusive commitment. Conversely, investors are also looking more closely at who will bear their due diligence costs if the startup withdraws or makes false statements. It remains standard market practice for everyone to bear their own costs unless otherwise agreed. But the trend in 2025: in term sheets of seed rounds of large investors, it is more common to find a standard “costs” paragraph with either “each party bears its own costs” (to create clarity) or, in the case of more and more funds, “company bears legal costs up to X euros”. The latter used to be more common in Series A/B, but is now sometimes already common in larger seed rounds (e.g. in 2024, some VC term sheets limit the investor legal costs to be borne by the startup to €10,000, for example). This reflects the tight budgets of VCs – more attention is being paid to costs. On the one hand, this is an additional burden for start-ups, but on the other hand, they know what to expect.
• No drastic shift to investor favor: Despite the market situation, seed term sheets in Europe do not suddenly have completely investor-friendly terms. According to data (e.g. a 2024 report on several hundred term sheets), most contract terms remained at the previous year’s level. There was no mass “grab” for tougher clauses. Rather, investors are once again paying more attention to traditional protective rights (such as vetoes, reservations of consent, anti-dilution), which are standard anyway. Some previously generous points are being normalized – e.g. a higher liquidation preference is being discussed more often again instead of a flat 1×, or pay-to-play clauses are being agreed in preparation for follow-up financing. But there can be no talk of a strong swing: Market standard remains market standard. Good start-ups continue to receive “fair” term sheets because the competition for the best deals is still there.
• SAFE and convertible loans as an alternative: One development in early-stage financing is the increased use of uncomplicated instruments such as SAFE (Simple Agreement for Future Equity) or convertible loans. In 2024, some investors (especially international or accelerators) are increasingly turning to standard agreements without a large term sheet in pre-seed – such as the SAFE popularized by Y Combinator, which does not even require a classic term sheet process. However, the classic equity round with term sheet is still very common in Germany. Nevertheless, startups should know that if an investor offers a SAFE, many of the typical term sheet points are not negotiated here (the valuation, for example, often indirectly via discount/cap). Market development is therefore two-pronged: either quick cuts via standard documents (especially for small tickets), or detailed term sheets for larger seed rounds with several investors.
• Diversity and impact clauses: A modern trend, especially in the UK/US, is diversity, ESG or DEI clauses in term sheets. In 2024, we are increasingly seeing around 10% of VC deals in Europe containing a diversity clause – e.g. commitments to diversity in the team or reporting on this. For smaller startups, this is not yet a big factor, but it indicates the general trend that investors also want to include non-financial conditions (e.g. a clause stating that the startup is committed to pursuing certain ESG goals). These clauses are still rare and often softly worded, but some 2025 term sheets may include such aspects, especially if the investor has institutional ESG requirements.
• Employee stock option plans (VSOP/ESOP): Recently, many investors have already mentioned in the term sheet that an ESOP pool should be set up or increased (typically 10-15% of the cap table reserved for employee options). This is not new, but has become standard: in 2024, practically all VC term sheets called for an ESOP pool (often priced in “pre-money”). Startups should be prepared for this and understand this in the term sheet because it has a de facto impact on dilution. The increased transparency can be seen as a positive trend – founders know what they are getting into at an earlier stage.
• Extension rounds and flat rounds: Due to the more difficult environment, so-called “extension rounds” (extension of the last round at the same price) have become more common. For term sheets, this means that sometimes an addendum term sheet is simply made, stating that further capital will be added to the old terms. This approach saves hard revaluations and keeps the terms the same. However, founders should note that investors often reserve the right to include additional small protective clauses in such cases (e.g. liquidation preference is treated separately for new money). Overall, however, 2024 has shown that many seed financings take place as a “flat round” (same valuation as before) in order to avoid downrounds – this is of course reflected in the term sheet (where perhaps there was always a high upside in 2021, in 2024 you often see constant or slightly increased valuations).

The bottom line remains the same: term sheets in 2024/25 largely follow the familiar patterns (1× liquidation preference, vesting, etc.). Readjustments tend to concern nuances: a little more caution and hedging, clearer cost and exit clauses, and increased standardization (partly via SAFE). For small start-ups, this means that you should be prepared for solid investor protection clauses without panicking – the vast majority of seed investors continue to use “fair” standard market terms, as they are also interested in a positive relationship. But the professionalism and completeness of term sheets have increased: in 2025, hardly any serious VC will send a 1-page term sheet; they are often more extensive documents (5-8 pages) that outline all the important points. This helps to avoid misunderstandings later on, but increases the complexity for founders – and therefore the need to seek advice (see next section).

Recommendations for startups when dealing with term sheets

For startup founders who are negotiating a term sheet for the first time, it is essential to take the term sheet seriously! Although it is “only” a preliminary stage to the contract, this is where the decisive course is set. Here is some practical advice:

• Obtain legal advice at an early stage: The apparent lack of obligation tempts people to sign without a lawyer – “the lawyer will then look at the contract”. This is dangerous. As shown, the contents of the term sheet are difficult to change later and certain clauses are even immediately binding. A lawyer experienced in start-ups can help to identify pitfalls in the term sheet, interpret terms correctly and adapt wording if necessary. The money spent on advice during the term sheet phase is a good investment, as mistakes made here can be expensive or even impossible to correct in the final contracts. Many law firms even offer start-ups flat-rate checks of such documents. Take advantage of this – especially during initial discussions with investors.
• Understand every clause: Founders should not sign anything they do not fully understand. Term sheets contain some legal vocabulary (liquidation preference, anti-dilution, drag-along, vesting, etc.). Take the time to learn these terms or have them explained to you. If necessary, ask the investor or their lawyer – a reputable partner will explain transparently what the clauses mean. Be sure to clarify any unclear points. There are numerous resources (books, blogs, mentors) that explain common VC clauses. Do your homework. Ignorance at this point can mean that you agree to a mechanism that is disadvantageous to you and has major consequences later on (e.g. a full ratchet anti-dilution can massively dilute the founders’ shares in down rounds – something you should have understood beforehand).
• Negotiate important points now, not later: Be aware that the term sheet is the negotiation of the economically important points. Everything that seems important to you – be it the valuation, the amount of the liquidation preference, the control rights (board seats, vetoes), vesting conditions for your founding team, milestones, ESOP size, anti-dilution type, drag/tag-along – discuss it in the term sheet. Both sides should have a consensus by this point at the latest, as only fine-tuning takes place in the investment agreement. If an investor says “we’ll clarify this or that later”, ask what the expectation is. Otherwise you will fall into the trap of being surprised by the draft contract. Of course, not all details (e.g. exact wording of every guarantee) need to be in the term sheet, but the deal principles should be included. For example, it is sufficient to say “anti-dilution according to weighted average method” without any formula – but it must be clear that there is to be anti-dilution protection and what basic type. Or: “Vesting 4 years, 1 year cliff, good leaver market conditions on exit” – the exact conditions are then set out in the contract. But if vesting is not mentioned at all in the term sheet, the investor will still demand it – but then you as the founder will no longer have a basis for comparison and will be under time pressure. Remember: Everything that is in the term sheet has already been negotiated “fairly”, at least roughly; everything that only pops up in the contract is negotiated under stress. Try to avoid this.
• Pay attention to balanced formulations: Especially with binding clauses (NDA, exclusivity, costs), make sure that they are balanced. Example of exclusivity: A certain period of exclusivity is understandable. But if an investor asks for e.g. 6 months of exclusivity, this could paralyze your startup if he hesitates. Suggest shorter periods (e.g. 3 months or gradual extension only if progress is made). Or agree that the exclusivity ends if the investor does not deliver a draft contract by date X – this way you protect yourself from stalling tactics. For NDA: Make sure it is reciprocal (both sides confidential, not just you). For costs: If you are to bear the investor costs, be sure to set a cap (maximum amount) and link it to the fact that it only happens in the event of success or in the event of your unjustified termination – but not if the investor bails out.
• Avoid unnecessary obligations: Sometimes LOIs contain superfluous or overly strict clauses that are risky for small startups. Example: An investor wants a non-compete clause in the term sheet that prohibits the founders from pursuing other activities. A certain focus requirement is okay (the investor wants the founders to devote all their energy to the company). But a non-compete clause that is too broad could bind the founders for a long time, even if the deal does not finally materialize – that would be fatal. You should only accept such clauses in the term sheet to a very limited extent or not at all. You should also avoid complex milestone payment plans (see above) unless they are part of the deal model. Keep it simple is a good motto: the more complex you regulate things in the letter of intent, the more potential breaking points you create. As a young startup, it is often better to do a clear equity round than to include mezzanine or debt components now, for example, which you may regret later.
• Get a second opinion: In addition to legal advice, it is helpful to talk to other experienced founders or mentors about the term sheet. The startup community often shares experiences anonymously, and there are published standard term sheets (e.g. from the German Standards Setting Institute or some VCs). Compare your received term sheet with market standards. Is something unusually harsh? Then ask whether this is really necessary. Practicality: Many terms have a “market standard” range – if your investor deviates significantly from this (e.g. a seed investor demands 3× liquidation preference plus participating – which would be very investor-friendly), you should object or at least know that this is not usual. Of course, in special situations deviations may be justified, but know your “benchmark”. Sources for this are, for example, published samples or reports from associations.
• Multiple options create negotiating power: If possible, try to talk to more than one investor at the same time. If you have two term sheet offers, this improves your negotiating position enormously. You can compare conditions and negotiate better terms if necessary (“But investor B offers us valuation X without this strict veto”). Even if you don’t play this out openly, it gives you the internal security of not having to accept everything. Of course, this is a luxury and not granted to every founder – often you are happy to have exactly one interested party. But you can still act strategically as if you do: Take your time, get feedback, don’t say yes hastily just for fear of losing the offer. Good investors realistically give a startup a few days to review and sign a term sheet. You should use this time to take further soundings if necessary.
• Pay attention to exit clauses: Exit expectations are sometimes outlined in the term sheet (e.g. investor expects an exit after 5-7 years, or drag-along from year Z). Check whether these expectations are realistic and acceptable for you. Especially in the case of drag-along (obligation to co-sell) – the usual standard is: The investor can force all shareholders to sell after a certain period of time if a buyer wants to buy all shares and a minimum valuation is reached. Check whether there are already figures in the term sheet (minimum price, etc.). Only agree to this if you can live with it. Liquidation preference: If it is not capped, this could be unfavorable for you in the exit – if unclear, ask for a cap. If in doubt, you should address these fine points now.
• Find a realistic valuation: First-time founders in particular sometimes tend to set a very high company valuation in the term sheet in order to give up few shares. Market 2024 seed valuations are slightly more moderate than 2021. Listen to your investor as to what is justified and don’t be afraid to accept a fair valuation. An inflated valuation often comes with stricter protective clauses (“dirty terms”) that can hurt you more in the long run than a few percent more levy. It is better to have a fair, balanced term sheet with a normal valuation than a high stakes one with gagging terms.
• Be skeptical of milestones: If investors insist on milestone tranches (sometimes for large amounts in pre-seed), negotiate the terms as clearly as possible. Try to set objective criteria and ideally that the investor is not the sole judge of fulfillment. It is often wiser to take a smaller amount in full now than a larger amount in uncertain installments.
• Written documentation: Verbal side agreements should be avoided. All important commitments should be included in the term sheet in writing. What is not in writing is not valid in case of doubt. For example, if the investor says “Oh, we’ll only take the board seat as long as X is with us ” – write it in or ignore it. A term sheet should be the only source of agreement. Later on, no one remembers verbal promises, or people change. So it’s better to have one more clarification in the term sheet than not enough.
• Common sense: Despite all the legal constructs, the term sheet should also make practical sense. For each clause, ask yourself: “What does this mean in concrete terms for everyday life and worst-case scenarios?” For example, if there is a veto right for “all expenses > €10,000”, consider this: Is this practical or does it block the business? If necessary, set it higher. Or if exclusivity is 6 weeks – is that realistically enough to check everything and make contracts? If not, it is better to agree on 10 weeks to avoid unnecessary stress. The term sheet is a preliminary contract, but it should make the collaboration easier, not more difficult. Both sides have an interest in clarity and a positive relationship. A “profit-seeking” negotiation of every single term down to the last drop of blood is not advisable – the result should be a balanced paper that makes the deal fair for both. Think long-term: the investor becomes your partner. A fairly negotiated term sheet lays the foundation for good cooperation and trust.

Conclusion for founders: Don’t be fooled by the non-binding nature of a term sheet – in reality, the decisive economic specifications for your financing are set out here, which are later included in the binding contract. Therefore: read thoroughly, understand everything and, if in doubt, seek professional help. Don’t be afraid to ask questions or renegotiate before you sign. A serious investor will expect you to treat the term sheet with the same care as a contract – this demonstrates professionalism. And finally, don’t panic during tough negotiations – it’s better to clarify critical points now or change investors if necessary than to enter into a partnership that will last for years with an unfavorable term sheet. If possible, use competition between investors to achieve better conditions for you (e.g. higher valuation or more lenient clauses). And once you have a satisfactory term sheet, stick to it yourself – it is the guideline for a hopefully successful investment relationship.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.