Term Sheets in NZ: What Startups and Businesses Should Check

If you’re raising money, bringing on a strategic partner, or negotiating a major commercial deal, you’ll probably hear the words “term sheet” pretty early on.

Term sheets can feel informal (sometimes they’re literally a two-page PDF), but they often shape the entire deal - including the parts that matter most when things get stressful, like control, dilution, exit rights, and what happens if someone wants out.

In this guide, we’ll walk you through what a term sheet is, what to look for, what’s usually binding (even when the rest isn’t), and how to negotiate one in a way that protects your business from day one.

What Is A Term Sheet (And When Do You Need One)?

A term sheet is a document that sets out the key commercial and legal terms the parties have agreed in principle, before you spend time (and legal fees) drafting the full formal agreements.

In New Zealand, term sheets are common in situations like:

• Startup investment (friends/family rounds, angel investment, seed funding, etc.)
• Capital raising by established small businesses
• Share sales or acquisitions (including partial buy-ins)
• Joint ventures and strategic partnerships
• Convertible notes or other early-stage funding instruments (the commercial terms often appear in a term sheet first)

Practically, a term sheet helps you:

• Get alignment early on the deal “headline” terms (valuation, equity %, governance, key protections)
• Identify deal-breakers before you invest time into drafting long contracts
• Create a roadmap for lawyers to draft the final documents accurately

It’s also a reality check. If you can’t agree on the term sheet, it’s a sign the full deal will be painful (or not viable).

Are Term Sheets Legally Binding In New Zealand?

This is where many founders get caught out: a term sheet is often described as “non-binding”, but in practice parts of it can still be binding - and whether anything beyond those expressly binding clauses is enforceable depends on how the document is drafted and what the parties intended.

In New Zealand, whether a term sheet (or any part of it) is binding can depend on factors like:

• Offer and acceptance
• Intention to create legal relations
• Certainty of the key terms
• Consideration (in simple terms: something of value being exchanged)

It’s common for term sheets to state that the commercial deal terms are “subject to contract” (meaning the parties don’t intend to be legally bound on those points until the final documents are signed). Even so, certain clauses are often expressly binding, such as:

• Confidentiality (protecting your financials, customer data, IP, and roadmap)
• Exclusivity / no-shop (you agree not to seek other deals for a period)
• Costs (who pays for legal/accounting due diligence)
• Governing law and jurisdiction (usually New Zealand)

If your term sheet includes an exclusivity clause, treat it seriously. You might be preventing yourself from talking to other investors or partners while the other side runs due diligence - and if they walk away, you’ve lost momentum and time.

If you’re not sure what’s actually binding, it’s worth getting advice before you sign - especially if the drafting goes beyond a summary of principles, the document uses language like “the parties agree” (rather than “intend”), or you’re being asked to start acting as if the deal is already done.

What Should A Term Sheet Include? (The Practical Checklist)

There’s no single standard term sheet that fits every business, but most term sheets cover a mix of commercial deal terms and legal risk allocation. Below is a practical checklist you can use when reviewing one.

1) The Parties And The Deal Structure

Start with the basics:

• Who are the parties (company, investors, shareholders, parent entities)?
• Is it an equity investment, a share sale, a loan, or a hybrid?
• Is the investor subscribing for new shares (raising capital into the company), or buying shares from existing owners?

If your company structure isn’t settled yet, that can change the whole negotiation. For example, if you intend to bring investors in, setting up your entity properly and adopting a fit-for-purpose Company Constitution can make the process smoother.

2) Valuation And How Much Equity Is Being Issued

For equity deals, term sheets usually state:

• The pre-money valuation or post-money valuation
• The amount being invested
• The equity percentage the investor will receive
• Whether there’s an option pool (and who it comes out of)

Be careful here - founders often focus on valuation, but the “extras” can change the effective economics of the deal (for example, large option pools or preferential terms).

3) Governance: Who Controls The Company After The Deal?

This is where many small business owners feel the impact of a term sheet long after the money lands.

Common governance terms include:

• Board composition (who appoints directors)
• Voting thresholds for major decisions
• Reserved matters requiring investor consent (e.g. issuing new shares, taking on debt, changing the business model)
• Reporting requirements (monthly management accounts, budgets, KPIs)

Even if you keep majority ownership, heavy “reserved matters” can limit your practical ability to run the business day-to-day.

In many cases, these rights later flow into a formal Shareholders Agreement, so it’s worth thinking ahead: “Will we still be able to move quickly in 12 months?”

4) Investor Protections (And What They Mean For You)

Investors often ask for protections to manage risk. That’s normal - but you still want to make sure the protections are proportionate to the deal size and your stage of growth.

Common investor protection terms include:

• Anti-dilution (protection if a later round happens at a lower valuation)
• Pre-emptive rights (right to participate in future share issues)
• Information rights (regular financial and operational reporting)
• Liquidation preference (who gets paid first if the company is sold or wound up)

A liquidation preference is a big one. It changes the order of payouts in an exit. Two deals can have the same valuation on paper but very different real outcomes depending on preference terms.

5) Exit Rights: Drag-Along, Tag-Along, And Sale Triggers

Term sheets often cover what happens if the business is sold or a shareholder wants to exit.

• Drag-along: majority holders can force minority holders to sell on the same terms
• Tag-along: minority holders can “tag” into a sale by majority holders
• IPO / trade sale expectations: sometimes included as target pathways

Exit rights are usually framed as “standard”, but the details matter. For example, what percentage triggers a drag? Does it apply to all shareholders or only certain classes?

6) Conditions Precedent And Due Diligence

Most term sheets include conditions that must be satisfied before the deal completes, such as:

• Legal due diligence and financial due diligence
• Final approval by the investor’s committee
• Execution of formal documents (subscription agreement, shareholders agreement, constitution updates)
• Any required third-party consents (e.g. lenders, key customers, landlords)

This is where timing becomes important. If you’re under cash pressure, you need to know what’s realistically achievable - and what could delay completion.

Common Term Sheet Traps For Startups And Small Businesses

A term sheet is meant to simplify negotiations. But if it’s vague or one-sided, it can lock you into a bad position before the real drafting starts.

Here are common issues we see in term sheets for New Zealand startups and small businesses.

Exclusivity That Stops You From Keeping Options Open

An exclusivity period can sound harmless (“just 30 days”), but if the other side is slow, you can lose valuable time and momentum.

If exclusivity is requested, think about:

• How long it lasts
• Whether it automatically extends
• Whether it ends if certain milestones aren’t met (e.g. first draft documents by a set date)

“Non-Binding” Term Sheets With Binding Consequences

Even where the commercial terms are “subject to contract”, the way the term sheet is written (and acted on) can create real expectations and pressure. If you start operating as if the deal is done - announcing it, changing strategy, giving operational access - it can become harder to renegotiate later.

Unclear Share Classes Or Rights

Not all shares are equal. If a term sheet refers to preference shares, different voting rights, or special consent rights, you want clarity early.

This typically needs to be consistent with your Company Constitution (or the constitution may need updating).

Founder Obligations Hidden In The Deal

Some term sheets include founder-specific obligations, such as:

• Full-time work commitments
• Restraints on competing businesses
• Vesting / reverse-vesting (you “earn” your equity over time)
• Personal warranties or guarantees

These can be appropriate depending on the situation, but they should never be treated as boilerplate. They directly affect your personal risk and future flexibility.

Vague IP Ownership And Confidentiality

If your business value is tied to software, branding, creative assets, or know-how, IP ownership must be clear.

A term sheet is a good time to flag:

• Who owns the IP created to date
• Whether contractors have assigned IP to the business
• Whether any IP will be licensed rather than assigned

If you’re sharing business information during negotiations, a proper Non-Disclosure Agreement (or a binding confidentiality clause within the term sheet) helps manage the risk.

How To Negotiate A Term Sheet Without Slowing The Deal Down

A lot of founders worry that getting lawyers involved will “kill the momentum”. The reality is that a well-negotiated term sheet usually speeds the deal up - because it prevents big fights later when you’re already deep in drafting.

Here’s a practical approach that keeps things moving.

1) Start With Your Non-Negotiables

Before you mark up anything, identify what you must protect. For example:

• You want to keep operational control day-to-day
• You need flexibility to raise another round within 12 months
• You need clarity on exit rights and what a sale requires
• You want to avoid personal guarantees

Once you know your non-negotiables, you can be more relaxed about the less critical points.

2) Ask “What Does This Mean In Real Life?”

Term sheet language can be technical, but the impact is usually practical.

For each major clause, ask:

• When would this clause be used?
• Who benefits if there’s a dispute?
• What decision does this stop us from making quickly?
• What happens if the business underperforms?

For example, a “reserved matters” list might sound reasonable, but if it includes “approval of annual budget” and the investor can withhold approval, you could be stuck.

3) Keep The Term Sheet High-Level (But Not Vague)

A good term sheet is detailed enough to prevent surprises, but not so detailed that it becomes an unworkable mini-contract.

As a guide, it should clearly cover:

• Economics (valuation, investment amount, preference terms)
• Control (board, voting, reserved matters)
• Exit rights
• What’s binding and what isn’t

4) Make Sure The Term Sheet Matches Your Existing Setup

If you already have shareholders, a term sheet that ignores existing rights can cause issues later.

This is where it helps to look at your current governance documents, and whether you need to update or put in place:

• A fit-for-purpose Shareholders Agreement
• Company decision-making processes (including director resolutions)
• Employment arrangements for founders (so expectations and roles are clear)

If you’re bringing on staff as you grow alongside the investment, a solid Employment Contract also supports stability (and helps show investors the business is well-run).

What Happens After The Term Sheet Is Signed?

Once the term sheet is signed, the next phase is usually “documenting the deal”. This typically includes some combination of:

• A share subscription agreement (for new shares) or share sale agreement (for existing shares)
• An updated constitution (or adoption of a new one)
• A shareholders agreement
• Disclosure schedules, warranties, and indemnities
• Any side letters (for special reporting rights, founder arrangements, etc.)

This is also where due diligence findings get addressed. If the investor finds issues - for example, missing IP assignments, unclear customer contracts, or compliance gaps - they may ask for changes to price, warranties, or conditions before completion.

And if your business collects customer information, investor due diligence often checks your privacy compliance. Depending on your business model, it may be time to tighten up documents like a Privacy Policy.

The takeaway: signing the term sheet isn’t the finish line. It’s the start of the part where details matter, and where being organised can save you weeks.

Key Takeaways

• A term sheet sets the key deal terms before full legal documentation is drafted, and it often shapes the entire negotiation.
• Even if a term sheet is described as “non-binding”, some clauses (like confidentiality, exclusivity, and costs) are commonly binding, and whether any other parts are enforceable will depend on the drafting and the parties’ intention (often reflected by “subject to contract” wording).
• A strong term sheet should clearly cover valuation/equity, governance and control, investor protections, exit rights, and due diligence conditions.
• Common pitfalls include overly restrictive exclusivity periods, unclear share rights, heavy “reserved matters” that limit your ability to run the business, and founder obligations that increase personal risk.
• Negotiating a term sheet doesn’t need to slow the deal down - it usually speeds things up by avoiding major disputes later in the drafting stage.
• After signing a term sheet, you’ll typically move into formal documents like a shareholders agreement, constitution updates, and subscription/sale agreements, so it pays to align your term sheet with your existing structure early.

Tip: This article is general information only and isn’t legal advice. If you’d like advice on your specific situation, you should speak with a lawyer.

If you’d like help reviewing or negotiating a term sheet (or drafting the documents that come after it), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.