Term sheet and letter of intent: what to negotiate

A term sheet, or letter of intent, sets out the main terms of an investment before due diligence. In principle it does not oblige anyone to close, but its terms become the basis of the final documents. Whatever you fail to secure at this stage is very hard to win later, once the shareholders' agreement is being drafted.

I have read two-page term sheets and twelve-page ones. Length tells you nothing. The passage that matters often fits on one line, something like "exit provisions in line with market practice", and that is exactly the one that costs the most three years later.

What is a term sheet?

It is a document of a few pages summarising the terms of an equity investment: price, amount, instrument, the fund's rights, conditions. A letter of intent plays the same role, with wording more common in acquisitions. Nine headings come up almost every time.

The valuation figure is prepared before this document. The method is set out in valuing an unlisted SME.

Is a letter of intent binding?

Not on the deal, in principle. On several clauses, yes, from the moment you sign.

Confidentiality, exclusivity, cost allocation and governing law are almost always drafted as binding. A well-drafted term sheet contains a paragraph stating in plain words which clauses bind and which are only indicative. Look for it first. If it is missing, ask for it.

Exclusivity is the most common trap. While it runs, you cannot talk to another fund. If the investor drags its feet, you lose both time and your only leverage. An automatic end date and a dated due diligence timetable solve the problem.

Which clauses should you negotiate first?

Four, in this order.

1. The share class. Preference shares can give the fund the right to recover its money first, sometimes a multiple of it, ahead of the other shareholders on a sale. At the same valuation, this changes what the founder receives a great deal (calculation below).
2. Reserved matters. The fund often asks for a veto over the budget, major investments, new debt and senior hires. Too broad a list amounts to sharing management. Insist on a closed list, with thresholds in euros.
3. Exit clauses. Drag-along lets the fund force you to sell alongside it. Set a trigger threshold and a minimum price. Details in tag-along, drag-along and leaver clauses.
4. Leaver clauses. They set the price of your shares if you leave the company. Define precisely what a bad leaver is: gross misconduct, yes; leaving for health reasons, no.

What does a liquidation preference cost, in euros?

A calculation built for illustration, not a real file. A fund invests €1.5m for 25% of the capital (pre-money of €4.5m). Three years later, the company is sold for €4m for 100% of the shares.

Same entry valuation, same percentage on the share register. Between the first line and the last, the founder loses €1.125m on a €4m sale price. What the clause says, and what it costs you: this is the table to build before signing, with your own figures.

At a high sale price, the gap narrows in proportion. The preference bites hardest on average or disappointing exits, which is precisely when you would need the money.

How should you prepare for signing?

1. Have a corporate lawyer review the term sheet before you sign it, not after.
2. Cap the length of exclusivity and provide for it to end automatically.
3. List the conditions precedent as a closed list.
4. Put a number on each economic clause (preference, ratchet, drag-along) across three exit scenarios.
5. Negotiate valuation and rights in the same move.

Three things to refuse:

• a term sheet that refers to "market practice" for exit clauses;
• long exclusivity with no due diligence timetable;
• negotiating the valuation alone and leaving the rights "for the shareholders' agreement".

When two funders sign the same term sheet

Several public players say so themselves: they do not invest alone. Invest.BW (the Walloon Brabant provincial investment company) states that it never funds the whole requirement on its own and invests alongside other investors or the bank (terms published by Invest.BW). finance&invest.brussels (the Brussels-Capital Region's public financing body) advertises up to €5m for SMEs, as a co-investor (finance&invest.brussels website). Checked on each fund's website on 15.10.2026.

The practical consequence, in Wallonia as in Brussels: the term sheet often includes a condition precedent tied to another funder's approval, bank or private. Check that the two documents do not contradict each other on reserved matters or exit. In Flanders, PMV plays a comparable role as a public investment body; its terms are not part of this site's review.

The letter of intent in an acquisition

In an acquisition, the letter of intent is addressed to the seller. It sets the price or its formula, the structure (holding company, debt, the fund's contribution, possibly a vendor loan), the warranties expected and the timetable. The fund backing the buyer often appears as co-investor, which makes the offer more credible. ORSA (formerly Investsud, a Walloon evergreen investment fund), for instance, lists acquisitions and business transfers among the cases it finances, with a published ticket of €500,000 to €2,500,000.

After signing comes the audit: due diligence checks everything the letter of intent took for granted.