Are Series A term sheets binding?
Takeaway: No, a term sheet is explicitly non-binding, with the critical exception of the "No-Shop" and "Confidentiality" clauses, which are legally enforceable and prevent you from negotiating with other investors for a set period.
This is a critical point of understanding for any founder who receives a term sheet. With very few exceptions, a term sheet is a non-binding agreement. It is a statement of intent, a good-faith blueprint for a future deal, but it is not the final, legally enforceable contract itself. Either party—the company or the investor—can walk away from the deal for any reason during the process of drafting the definitive agreements without breaching the term sheet.
However, this "non-binding" nature has two very important and legally enforceable exceptions. Buried in the fine print of every standard term sheet are two provisions that are explicitly declared to be legally binding from the moment you sign: the Confidentiality clause and the "No-Shop" clause.
The Binding Provision: Confidentiality
The term sheet itself and the fact that you are in negotiations with a specific investor are considered highly confidential. The confidentiality clause legally obligates both you and the investor to keep the existence and the terms of the term sheet private. You cannot "shop" the term sheet to other investors by sharing its specific terms, though you can typically let other interested firms know that you have a term sheet in hand to create urgency.
The Most Important Binding Provision: The "No-Shop" or Exclusivity Clause
This is the most critical binding term in the entire document. When you sign a term sheet, you are agreeing to a period of exclusivity with that lead investor. This is known as the "no-shop" provision.
What it is: The no-shop clause legally prohibits the company from soliciting, negotiating with, or accepting an investment from any other potential investor for a set period of time, typically 30 to 45 days.
Why it exists: An investor is about to spend a significant amount of time and money on legal fees and due diligence to get the deal done. The no-shop clause gives them the assurance that you will not use their term sheet as leverage to get a better deal from another firm while they are doing this work.
The Consequence of a Breach: If you were to violate the no-shop clause and accept a deal from another investor during the exclusivity period, the original investor could sue your company for breach of contract.
Signing a term sheet is a major commitment. While you are not legally bound to complete the financing, you are legally bound to put your fundraising process on hold and to negotiate exclusively and in good faith with the investor who has offered you the term sheet. This is why it is so important to choose your lead investor and your partner wisely before you sign.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.