LOI vs Term Sheet: the Difference, Explained (2026)

LOI vs term sheet: the short answer A letter of intent (LOI) and a term sheet do the same job: they record the main terms of a proposed deal before the parties spend time and money drafting the definitive, binding contract. The difference is mostly in form and setting. - A letter of intent is written as a letter, in prose, addressed from one party to the other. It is common in mergers and acquisitions and in commercial deals.

• A term sheet is written as a list of bullet-point terms. It is the standard tool in venture-capital and investment rounds. In practice the words are often used interchangeably. What matters far more than the name is which parts are binding and which are not. This article is general guidance, not legal advice. Deal and securities rules vary by jurisdiction, so have a qualified professional review your document before you rely on it. ## Are LOIs and term sheets binding? Usually they are mostly non-binding, with a few binding exceptions. Both documents normally say clearly that the commercial terms (price, structure, scope) are non-binding and subject to a definitive agreement, so neither side can be forced to close on them. But both usually make a handful of clauses binding on purpose: - Confidentiality.
• Exclusivity / no-shop, stopping the seller or company shopping the deal for a set period.
• Costs, saying who pays their own fees.
• Governing law and jurisdiction.
• Standstill or good-faith negotiation, where agreed. Because a court looks at substance, not the title, a document can bind you on terms you did not intend if the binding-status wording is sloppy. Always state expressly which clauses are binding and which are not. ## LOI vs term sheet: side by side | Aspect | Letter of intent (LOI) | Term sheet | |---|---|---| | Form | Letter, prose | Bullet-point list of terms | | Common setting | M&A, commercial deals | Venture capital, investment | | Length | Often longer, more narrative | Short, scannable | | Binding status | Mostly non-binding, few binding clauses | Mostly non-binding, few binding clauses | | Next step | Definitive purchase or deal agreement | Definitive investment and shareholders' agreements | ## What each one typically covers A term sheet for an investment usually covers: - Valuation (pre-money and post-money) and amount raised.
• Instrument (equity, preference shares, convertible).
• Liquidation preference and anti-dilution.
• Board composition and reserved matters.
• Founder vesting, option pool, and investor rights such as information and pro-rata rights.
• Conditions to closing. An LOI for an acquisition usually covers: - The parties and the target.
• Price and structure (asset or share purchase).
• Key conditions and due-diligence access.
• Exclusivity period and confidentiality.
• Timeline to signing and closing. ## Why use one at all? A term sheet or LOI lets both sides check they agree on the big points before paying lawyers to draft a long contract. It flushes out deal-breakers early, frames the negotiation, and, through the exclusivity clause, buys the buyer or investor time to do due diligence without the deal being shopped elsewhere. ## Should you make it binding or non-binding? This is a deliberate choice, not an accident of drafting. Most parties want the commercial terms non-binding so they can walk away if due diligence turns up problems, while keeping a short list of clauses binding to protect the process. A clean document states this in one place: a clause that says the commercial terms are non-binding and subject to a definitive agreement, followed by a clause that lists exactly which provisions (confidentiality, exclusivity, costs, governing law) are binding. If you want a firmer commitment, you can add a duty to negotiate in good faith, but understand that how far a court will enforce such a duty varies by jurisdiction. The safest rule is to spell out the binding status for every section rather than leave it implied. ## Common mistakes to avoid - Vague binding-status wording. Say clearly which clauses bind and which do not; this is the single most important drafting point.
• Agreeing terms you will regret. Although non-binding, the term sheet sets the anchor. It is hard to walk back a term later, so negotiate it properly now.
• Ignoring exclusivity length. Too long favours the buyer; too short gives no protection for due diligence.
• Forgetting securities and regulatory rules. Investment terms can engage company-law and, for foreign money in India, FEMA rules.
• Treating it as the final contract. It is a map, not the deal. The definitive agreements control. ## A note on jurisdiction LOIs and term sheets are used worldwide, but the surrounding law differs. In India an investment term sheet leads into a share subscription and shareholders' agreement and can engage the Companies Act, 2013 and, for foreign investors, FEMA and the rules on pricing and instruments. In the US and UK the securities, tax and corporate rules differ again. Because the binding effect and the regulatory overlay vary by jurisdiction, confirm the governing law and the applicable securities and exchange-control rules before you sign. ## When one workspace helps Signing a term sheet or LOI starts a deal rather than finishing it. The work that follows is making sure the binding clauses say exactly what you meant, checking that each term carries through faithfully into the definitive agreements, tracking exclusivity and closing dates, and keeping versions straight across several drafts and parties. An AI workspace tuned to how your company does deals can hold all of that in one place: early-stage drafting, per-clause risk, plain-language edits and the key dates. Adira is one example of a workspace built for early deal documents. This explanation alone is enough to use an LOI or term sheet correctly.