Term Sheet vs Shareholders Agreement – What’s The Difference? (2026 Updated)

If you’re raising money, bringing on a co-founder, or finally turning “this could be big” into an actual company, you’ll probably hear two documents mentioned early: a term sheet and a shareholders agreement.

They can sound similar (and people sometimes use them interchangeably), but they do very different jobs. Getting them mixed up can leave you with a handshake deal that’s hard to enforce, or a “quick” investor process that turns into a painful renegotiation later.

This 2026 update reflects how modern New Zealand startups and growth businesses are doing deals right now: faster fundraising cycles, more angel syndicates, more employee equity, and more focus on clear governance from day one.

Let’s break down what each document is, when you need them, and how they work together in a clean, founder-friendly way.

What Is A Term Sheet (And What Does It Actually Do)?

A term sheet is a document that sets out the headline commercial terms of a proposed investment or transaction.

Think of it as: “Here’s the deal we’re intending to do, in principle.” It’s usually signed before the long-form legal documents are drafted.

When You’ll Typically Use A Term Sheet

Term sheets are common when you’re:

• Raising an equity round (angel, seed, Series A, etc.)
• Bringing on a strategic investor (someone investing and partnering with you)
• Planning a convertible instrument (depending on structure)
• Trying to move quickly while lawyers work on the detailed documents

In startup land, term sheets are often used as a “commitment checkpoint” so everyone can invest time and legal spend with confidence.

What’s Usually In A Term Sheet?

Term sheets can vary a lot, but they usually cover topics like:

• Valuation (pre-money/post-money, or implied price per share)
• Investment amount and timing (tranches, milestones)
• What shares are being issued (ordinary shares, preference shares, etc.)
• Key investor rights (information rights, veto rights, board seat)
• Founder and employee equity expectations (option pool / ESOP discussions)
• Conditions precedent (due diligence, board/shareholder approvals, IP assignment, etc.)
• Exclusivity (whether you must negotiate only with that investor for a period)
• Confidentiality and announcement rules
• Costs (who pays legal fees and what caps apply)

A term sheet is meant to keep things clear and efficient. But it can also lock you into assumptions that later become hard to unwind.

Is A Term Sheet Legally Binding In New Zealand?

Sometimes yes, sometimes no - and this is where people get caught out.

Many term sheets are intended to be “non-binding” on the main deal terms (like valuation), but binding on specific clauses such as:

• Confidentiality
• Exclusivity / no-shop
• Costs
• Governing law and dispute process

The practical takeaway is simple: don’t assume a term sheet is “just a casual summary”. If you sign it, you may be committing to real obligations - and you may also be shaping the final deal more than you realise.

It’s also worth knowing that even “non-binding” documents can create risk if they’re written in a way that looks like a completed agreement, or if the parties act as though the deal is already final.

What Is A Shareholders Agreement (And Why It Matters After The Deal)?

A shareholders agreement is a long-form legal contract that sets the rules for how shareholders will:

• own the company together
• make decisions
• fund the business (or not)
• sell shares (or exit)
• deal with disputes

It’s designed to work when things are going well and when things get messy. That’s why it’s one of the most important “sleep at night” documents for founders and investors.

In many investments, the shareholders agreement is where the term sheet’s concepts are converted into enforceable rights and obligations (with proper definitions, timelines, processes, and remedies).

In New Zealand, it’s also very common for the shareholders agreement to be used alongside a Company Constitution, which sets out internal company rules under the Companies Act 1993. The two documents should work together, not contradict each other.

Common Clauses You’ll See In A Shareholders Agreement

While every business is different, a typical shareholders agreement will deal with:

• Governance: what decisions require shareholder approval, board composition, voting thresholds
• Reserved matters: decisions that can’t happen without investor consent (e.g. issuing new shares, big spending, changing business model)
• Share transfers: when someone can sell, who gets first rights, and restrictions
• Pre-emptive rights: rights for existing shareholders to buy new shares before outsiders
• Drag-along and tag-along rights (so exits happen cleanly and fairly)
• Founder leaver provisions: what happens if a founder leaves early (often linked to vesting)
• Information and reporting: financial statements, budgets, investor updates
• Confidentiality and IP protection
• Dispute resolution: negotiation steps, mediation, deadlock processes

If you’re putting in place a Shareholders Agreement, it’s a good sign you’re treating governance seriously - which tends to make fundraising, hiring, and scaling smoother.

Term Sheet Vs Shareholders Agreement: The Key Differences (In Plain English)

Here’s the simplest way to think about it:

• A term sheet helps you agree on the deal quickly.
• A shareholders agreement helps you live with the deal for the next few years.

More specifically, these are the major differences business owners should understand.

1. Timing: Before Vs After

• Term sheet: Usually signed before the final legal docs, as the “in principle” agreement.
• Shareholders agreement: Usually signed at completion (or as part of the investment closing pack), once everyone is officially shareholders together.

2. Detail Level: Headline Terms Vs Full Rules

• Term sheet: A summary of the core economic and control terms.
• Shareholders agreement: The detailed rules, processes, definitions, and enforcement mechanisms.

This difference matters because disputes usually happen in the “grey areas” - and term sheets often don’t have enough detail to manage those properly.

3. Legal Effect: Often Partly Binding Vs Fully Binding

• Term sheet: Often non-binding on deal terms, but binding on confidentiality/exclusivity/costs (depending on drafting).
• Shareholders agreement: Binding legal agreement setting out shareholder rights and obligations.

If you want enforceability, you usually need the shareholders agreement (and supporting documents) done properly.

4. Purpose: Getting To “Yes” Vs Avoiding Problems Later

• Term sheet: Designed to get parties aligned and reduce wasted negotiation time.
• Shareholders agreement: Designed to avoid misunderstandings, prevent deadlocks, and set expectations for what happens if someone wants out.

A good shareholders agreement can also make your company more investable, because it shows your governance is stable and predictable.

Do You Need Both (Or Can You Skip One)?

In many cases, you’ll use both. But not always.

The right answer depends on the size of the deal, the relationship between the parties, and how complex the ownership/governance will be.

When A Term Sheet Is Usually Worth It

A term sheet is often useful when:

• multiple parties are involved (e.g. an angel syndicate)
• you want to move fast without negotiating every clause upfront
• you need to confirm valuation and structure before spending on full documentation
• there’s a real risk of “deal drift” without a clear written summary

It’s also common when fundraising involves staged due diligence. For example, the investor might want a term sheet signed first, then conduct legal and financial diligence.

That diligence can include company structure and cap table checks, director obligations, and IP ownership issues - which is why it helps to get your core setup right early (not mid-round).

When A Shareholders Agreement Is Non-Negotiable

You generally shouldn’t skip a shareholders agreement when:

• you have more than one founder and you’re building a growth business
• investors are coming on board (particularly with control rights)
• shareholdings aren’t equal, or roles and contributions are different
• someone may leave, reduce hours, or stop contributing while keeping shares
• you want a clear process for future capital raises and exits

And if you’re including vesting, leaver rules, or founder “what if” scenarios, you’ll often need supporting documents too, such as a Share Vesting Agreement.

When You Might Not Need A Term Sheet

In smaller, straightforward deals, you might go straight to the long-form documents without a separate term sheet - for example, where:

• there’s one investor and the terms are simple
• the parties already know each other well
• you’re doing a small friends-and-family round with minimal special rights

That said, even “simple” rounds can turn complicated quickly once you start discussing control rights, future fundraising protections, or founder departures.

Common Mistakes Founders Make (And How To Avoid Them)

Most issues we see aren’t because founders did anything “wrong” - they’re usually because everyone was moving quickly and assumed the other party meant the same thing.

Here are some common traps to watch for.

Signing A Term Sheet Without Understanding The Control Terms

Founders often focus on valuation and the amount being invested. But the real long-term impact can come from control terms, like:

• veto rights over spending or hiring
• board composition
• future fundraising restrictions
• preferences on exit

If you’re not clear on these upfront, you can end up “agreeing in principle” to something that significantly changes how you can run the business.

Assuming The Shareholders Agreement Will “Sort It Out Later”

It’s true that the shareholders agreement is where the real detail lives.

But in practice, once a term sheet is signed, both sides tend to treat it as the deal’s blueprint. If you later try to renegotiate key points, it can damage trust or stall the round.

A good approach is to treat the term sheet as the place to lock in the big points, and the shareholders agreement as the place to lock in the workable points.

Forgetting About The Constitution (And Getting Inconsistencies)

In NZ, your constitution (if you have one) and your shareholders agreement need to align.

If they clash, you can end up with uncertainty around decision-making, shareholder rights, and how key processes actually operate.

That’s why companies often update or adopt a Company Constitution as part of an investment round, rather than treating it as an afterthought.

Not Planning For “What If A Founder Leaves?”

This is uncomfortable, but it’s one of the most important reasons these documents exist.

Imagine this: you and your co-founder start with 50/50 shares. Two years later, one of you wants to step away, but keeps the shares and still has voting power. If there’s no clear leaver/transfer process, the company can become stuck - especially when investors want certainty.

Vesting structures can help align equity with contribution over time. This is where a Share Vesting Agreement can play a practical role in reducing risk for everyone.

Not Matching The Legal Documents To The Fundraising Structure

Not every capital raise is the same. Sometimes you’re issuing new shares. Sometimes you’re selling existing shares. Sometimes you’re using a different mechanism altogether.

If your deal involves a share issue or share sale, the “closing pack” often includes a share transaction document that sits alongside (and interacts with) the shareholders agreement. For example, in some situations you might use a Share Subscription Agreement to document the actual issue of new shares to an investor.

Getting the structure wrong can lead to costly clean-up later - including problems with cap tables, shareholder approvals, and future rounds.

Key Takeaways

• A term sheet sets out the proposed deal’s headline terms and is typically used to align everyone before drafting the full legal documents.
• A shareholders agreement is the detailed, binding rulebook for how shareholders own, govern, fund, and exit the company together.
• Term sheets are often partly binding (e.g. confidentiality, exclusivity, costs), so you should treat them seriously before signing.
• A shareholders agreement is especially important where there are multiple founders, investors, unequal contributions, or any real possibility of someone leaving or selling shares.
• Your shareholders agreement should align with your constitution and any supporting equity documents (like vesting or share subscription documents) to avoid inconsistencies.
• Getting these documents right early helps protect your business from day one and makes future fundraising and growth much smoother.

If you’d like help with a term sheet, a shareholders agreement, or structuring an investment round, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.