Term Sheet in Startup Investments: Is It Legally Binding in Turkey?

A term sheet is one of the first major legal documents used during a startup investment process.

When founders and investors begin discussing a financing round, they usually negotiate several commercial issues before preparing the final investment documents.

These issues may include:

• company valuation,
• investment amount,
• investor ownership percentage,
• share class,
• liquidation preference,
• anti-dilution rights,
• board representation,
• founder vesting,
• employee option pool,
• investor veto rights,
• pre-emption rights,
• drag-along rights,
• tag-along rights,
• confidentiality,
• exclusivity, and
• closing conditions.

Rather than immediately drafting a lengthy investment agreement and shareholders’ agreement, the parties may first summarize these principal terms in a term sheet.

The term sheet can therefore act as a roadmap for the transaction.

However, one of the most important questions for founders and investors is:

Is a startup term sheet legally binding in Turkey?

The answer is not simply yes or no.

A term sheet may contain:

• non-binding commercial provisions,
• binding legal provisions, or
• a combination of both.

Whether a particular provision is binding depends on:

• the wording of the term sheet,
• the intention of the parties,
• the nature of the provision,
• applicable Turkish contract law principles, and
• the circumstances surrounding the negotiations.

For this reason, founders should never assume that a document is legally insignificant merely because it is called a “term sheet.”

This article explains how startup term sheets work in Turkey, which provisions are commonly binding, which provisions are usually non-binding, and what founders should consider before signing one.

What Is a Term Sheet?

A term sheet is a document summarizing the principal commercial and legal terms of a proposed investment.

It is usually signed before the parties prepare the final transaction documents.

A startup term sheet may identify:

• the investor,
• the startup,
• the founders,
• investment amount,
• valuation,
• proposed ownership,
• investment instrument,
• governance rights,
• founder obligations,
• economic preferences, and
• conditions for completing the investment.

The term sheet is generally shorter and less detailed than the final investment documentation.

For example, the term sheet may state:

Investor shall invest USD 2 million at a USD 8 million pre-money valuation.

The final Share Subscription Agreement may later contain detailed provisions regarding:

• payment timing,
• capital increase procedures,
• closing steps,
• representations and warranties,
• indemnification,
• termination, and
• corporate implementation.

The term sheet therefore establishes the commercial framework before detailed legal drafting begins.

Why Do Startups Use Term Sheets?

Preparing full investment documentation can require considerable time and expense.

Before lawyers begin drafting:

• Investment Agreements,
• Shareholders’ Agreements,
• Share Subscription Agreements,
• Share Purchase Agreements,
• amended Articles of Association, and
• closing documentation,

the parties generally want to confirm that they agree on the most important commercial points.

A term sheet allows them to identify disagreements early.

For example, the founder may believe:

• the startup is valued at USD 10 million,
• investor will receive 15%,
• founders will retain board control.

The investor may believe:

• valuation is USD 7 million,
• investor will receive 25%,
• investor will have equal board representation.

There is little reason to spend weeks drafting investment documents until these issues have been resolved.

A term sheet therefore makes the investment process more efficient.

Is a Term Sheet Mandatory Under Turkish Law?

No.

There is generally no requirement that startup founders and investors sign a term sheet before completing an investment.

The parties may proceed directly to final investment documentation.

However, term sheets are commonly used because they provide a practical framework for negotiating complex transactions.

They are particularly common in:

• venture capital investments,
• angel investments,
• private equity transactions,
• strategic investments,
• mergers and acquisitions, and
• startup financing rounds.

Is a Term Sheet Legally Binding in Turkey?

Potentially.

The legal effect depends on the actual document.

A term sheet may explicitly state that:

Except for Sections X, Y and Z, this Term Sheet is non-binding and does not create an obligation to complete the proposed investment.

In that situation, most investment terms may be intended merely as a basis for negotiations.

However, other sections may expressly be binding.

These commonly include:

• confidentiality,
• exclusivity,
• transaction expenses,
• governing law,
• dispute resolution,
• access to information, and
• sometimes non-solicitation obligations.

Therefore, a term sheet may be partly binding and partly non-binding.

The Title of the Document Is Not Decisive

A common mistake is assuming that calling a document:

• Term Sheet,
• Letter of Intent,
• Memorandum of Understanding,
• Heads of Terms, or
• Preliminary Agreement

automatically determines its legal status.

It does not.

The substance is more important than the title.

A document labeled “Non-Binding Term Sheet” may still contain certain binding provisions.

Similarly, a document called “Letter of Intent” may contain sufficiently definite obligations to create legal consequences.

The wording of every clause should therefore be reviewed.

Turkish Contract Law and the Intention of the Parties

Under Turkish contract law, agreements generally arise from the mutual and corresponding expressions of intent of the parties.

When evaluating the legal effect of a term sheet, relevant factors may include:

• whether the parties intended to create an obligation,
• whether essential terms were agreed,
• whether further documentation was expressly required,
• whether the transaction was conditional,
• whether the document states that it is non-binding,
• whether certain clauses are identified as binding, and
• subsequent conduct of the parties.

The legal interpretation does not depend solely on one sentence in isolation.

The overall structure and commercial context may also be relevant.

Non-Binding Commercial Terms

The commercial sections of startup term sheets are often stated to be non-binding.

These may include:

• valuation,
• investment amount,
• investor ownership,
• proposed share class,
• liquidation preference,
• anti-dilution,
• founder vesting,
• option pool,
• board structure,
• reserved matters,
• future financing rights, and
• exit rights.

The parties generally intend to finalize these points through definitive investment documentation.

However, founders should still treat these provisions seriously.

Even when technically non-binding, it can be commercially difficult to renegotiate a major term after signing the term sheet.

Why Non-Binding Terms Still Matter

Suppose founders sign a term sheet stating:

• USD 10 million pre-money valuation,
• USD 2 million investment,
• 1x liquidation preference,
• investor board seat,
• 10% employee option pool.

Two weeks later, during documentation, the founders say:

“We no longer agree to the liquidation preference.”

The investor may respond:

“This was already agreed in the term sheet.”

Even if the clause is legally non-binding, reopening it may:

• damage trust,
• delay the transaction,
• cause the investor to withdraw, or
• weaken the founders’ negotiating position.

A term sheet therefore creates substantial commercial expectations.

Founders should negotiate it with nearly the same attention as final documents.

Binding Confidentiality Clauses

Confidentiality is one of the provisions most commonly made binding.

During investment negotiations, the investor may receive access to sensitive information such as:

• financial records,
• customer lists,
• product roadmaps,
• source code information,
• pricing,
• future strategy,
• employee information, and
• investor discussions.

A confidentiality clause may prevent the investor from:

• disclosing information,
• using information for unrelated purposes, or
• sharing it with unauthorized third parties.

The term sheet should define:

• what information is confidential,
• permitted recipients,
• exclusions,
• duration, and
• legally required disclosures.

If a separate NDA already exists, the term sheet should clarify how the two documents interact.

Binding Exclusivity Clauses

Exclusivity is another common binding provision.

An investor may request that the startup stop negotiating with other investors for a certain period.

For example:

For a period of 45 days from the execution of this Term Sheet, the Company and the Founders shall not solicit, negotiate or enter into any investment transaction with any third party.

This is also commonly described as a:

• no-shop clause,
• exclusivity clause, or
• negotiation restriction.

The investor wants protection because it will spend time and money conducting due diligence and drafting transaction documents.

Why Exclusivity Is Risky for Founders

Exclusivity can create significant risk for startups.

Imagine a company has only three months of cash runway.

An investor requests 90 days of exclusivity.

During those 90 days:

• founders cannot negotiate with alternative investors,
• the investor conducts due diligence slowly,
• negotiations eventually collapse.

The startup may then have only a few weeks of cash remaining.

The investor has lost time.

The startup may have lost the company.

Founders should therefore negotiate exclusivity carefully.

How Long Should Exclusivity Last?

There is no universal period.

Possible periods may include:

• 30 days,
• 45 days,
• 60 days, or
• another negotiated period.

The appropriate duration depends on:

• transaction complexity,
• investor type,
• due diligence scope,
• regulatory requirements,
• corporate restructuring, and
• fundraising urgency.

For an early-stage startup, a long exclusivity period may be particularly dangerous.

Founders may consider mechanisms such as:

• automatic expiry,
• extension only by mutual agreement,
• investor diligence deadlines, or
• termination if the investor materially changes agreed terms.

No-Shop vs. No-Talk Clauses

An exclusivity provision can vary in scope.

No-Shop

The startup cannot actively seek competing offers.

No-Talk

The startup may also be prohibited from negotiating with third parties who approach independently.

A no-talk clause is generally more restrictive.

Founders should understand which version they are accepting.

Binding Expense Provisions

Term sheets may allocate transaction costs.

For example:

Each party shall bear its own legal and advisory expenses.

Alternatively:

The Company shall reimburse the Investor’s legal fees up to USD 25,000 upon Closing.

In some transactions, the company may be required to pay certain investor costs even if closing does not occur.

Founders should read expense provisions carefully.

A startup should avoid accepting unlimited investor legal fees.

Investor Legal Fees

Institutional investors sometimes require the startup to pay investor counsel fees from the financing proceeds.

For example:

Investor commits USD 3 million.

The term sheet provides that the startup will reimburse investor legal fees up to USD 30,000.

This means the company effectively receives less net cash.

A legal fee cap should therefore be negotiated.

Binding Governing Law

The term sheet may specify which law governs the binding sections.

For a Turkish startup, the parties may select:

• Turkish law,
• English law,
• Swiss law, or
• another legal system

for certain contractual matters, subject to applicable conflict-of-laws principles.

However, even where the term sheet selects foreign law, mandatory Turkish corporate law may continue to govern matters such as:

• capital increases,
• share issuance,
• corporate approvals,
• transfer formalities, and
• internal corporate structure

for a Turkish company.

A governing law clause cannot eliminate mandatory Turkish corporate requirements.

Binding Dispute Resolution

The parties may also agree that disputes arising from the binding provisions will be resolved through:

• Turkish courts,
• arbitration, or
• another agreed mechanism.

This can become relevant if one party breaches:

• confidentiality,
• exclusivity, or
• another binding obligation.

For cross-border startup investments, arbitration may sometimes be preferred.

However, cost and enforceability should be considered.

Binding Due Diligence Access Clauses

The term sheet may require the startup to provide the investor with reasonable access to:

• financial information,
• corporate records,
• contracts,
• employees,
• intellectual property documents, and
• regulatory information.

Such clauses may be binding even where the ultimate investment remains non-binding.

The startup should ensure that disclosure obligations remain subject to:

• confidentiality,
• data protection,
• trade secret protection, and
• third-party contractual restrictions.

Can an Investor Walk Away After Signing a Term Sheet?

Often yes, if the investment provisions are expressly non-binding.

An investor may decide not to proceed because of:

• negative due diligence,
• changing market conditions,
• internal investment committee rejection,
• funding issues,
• regulatory concerns,
• founder disputes, or
• changes in startup performance.

A properly drafted non-binding term sheet usually preserves the investor’s ability not to complete the transaction.

However, the investor may still remain bound by provisions such as:

• confidentiality,
• exclusivity,
• cost allocation, and
• governing law.

Can the Startup Walk Away?

Similarly, the startup may generally decide not to proceed where the investment provisions are non-binding.

However, binding exclusivity may temporarily prevent the startup from negotiating with alternative investors.

This is why founders should understand the difference between:

no obligation to close, and

an obligation not to negotiate with someone else.

The two are not contradictory.

A startup may be free not to close with Investor A while still being prohibited from negotiating with Investor B during the exclusivity period.

What Happens if an Investor Changes the Terms After the Term Sheet?

This is a common startup issue.

Suppose the term sheet states:

• USD 10 million valuation,
• 1x liquidation preference,
• one investor board seat.

After due diligence, the investor proposes:

• USD 7 million valuation,
• 2x participating liquidation preference,
• two board seats.

Can the investor do this?

If the commercial terms are non-binding, the investor may legally have the ability to propose revised terms.

However, whether such behavior is commercially reasonable depends on the circumstances.

A legitimate reason may exist if due diligence reveals serious problems.

For example:

• undisclosed debt,
• IP ownership defects,
• regulatory risk,
• inaccurate revenue numbers.

On the other hand, changing terms solely after locking the startup into exclusivity may create serious commercial concerns.

Founders should therefore negotiate protections against excessive retrading where possible.

What Is Retrading?

Retrading refers to an investor changing previously agreed commercial terms after the startup has:

• signed the term sheet,
• entered exclusivity, or
• invested significant time in due diligence.

For example:

Original valuation: USD 15 million

Revised valuation after six weeks: USD 10 million

Sometimes retrading results from legitimate due diligence findings.

Sometimes it reflects investor leverage.

Founders should consider:

• shorter exclusivity,
• clear diligence deadlines,
• materiality thresholds, and
• maintaining sufficient cash runway

to reduce vulnerability.

Term Sheet Valuation

Valuation is usually one of the first major terms.

The term sheet may state:

• pre-money valuation,
• post-money valuation, or
• price per share.

Founders should confirm exactly which valuation is being discussed.

For example:

USD 8 million pre-money valuation

USD 2 million investment

USD 10 million post-money valuation

Investor receives 20%.

However, the economics may change substantially if there is also a pre-money option pool.

Option Pool Provisions

A term sheet may require the startup to create or expand an employee equity pool.

For example:

A 10% fully diluted employee option pool shall be available immediately following Closing.

The critical issue is whether the pool is included:

• pre-money, or
• post-money.

If the pool is effectively created before the investment, much of the dilution may fall on the founders.

The option pool provision should therefore be analyzed together with valuation.

Fully Diluted Capitalization

The term sheet may define investor ownership on a fully diluted basis.

This may include:

• issued shares,
• employee options,
• warrants,
• convertible loans,
• SAFE-style rights, and
• other instruments.

Founders should insist on seeing a pro forma post-closing cap table.

It should show exactly what every shareholder will own after the transaction.

Liquidation Preference

A term sheet may specify investor liquidation preference.

For example:

1x non-participating liquidation preference.

This can materially affect exit economics.

Suppose an investor invests USD 3 million for 25%.

The company later sells for USD 5 million.

A 1x liquidation preference may allow the investor to receive USD 3 million before the remaining proceeds are distributed, depending on the precise terms.

Founders should not treat liquidation preference as technical legal language.

It can be economically more important than valuation.

Participating vs. Non-Participating Preference

The term sheet should specify whether the preference is:

• participating, or
• non-participating.

Non-Participating

Investor generally chooses between:

• receiving preference, or
• participating as an ordinary shareholder.

Participating

Investor may receive the preference first and then participate in remaining proceeds.

Participating preference can significantly reduce founder exit proceeds.

The distinction should be settled at term sheet stage rather than left for later documentation.

Multiple Liquidation Preference

An investor may request:

• 1x,
• 1.5x,
• 2x, or
• another multiple.

For example:

USD 5 million investment

2x liquidation preference

Potential priority amount:

USD 10 million.

In a low-value exit, founders may receive little or nothing.

The liquidation multiple should therefore be one of the first economic terms founders analyze.

Anti-Dilution

The term sheet may also address protection against future down rounds.

Common international structures include:

• full ratchet,
• broad-based weighted average, and
• narrow-based weighted average.

Full ratchet can be particularly aggressive for founders.

If the startup later raises capital at a substantially lower share price, the investor may receive a significant adjustment.

Founders should calculate hypothetical down-round scenarios before accepting the provision.

Founder Vesting

Investors frequently include founder vesting in the term sheet.

For example:

Founder shares shall be subject to four-year reverse vesting with a one-year cliff.

Founders who have already spent several years building the company may negotiate:

• vesting credit,
• partial immediate vesting,
• no new cliff,
• shorter remaining vesting period, or
• acceleration upon change of control.

The term sheet should clarify these points.

Leaving them until final documentation may create a major late-stage dispute.

Good Leaver and Bad Leaver

The term sheet may also summarize how founder departure will be treated.

For example:

• Good Leaver retains vested shares,
• unvested shares are subject to transfer,
• Bad Leaver shares may be treated differently.

Even if the detailed definitions are left to the Shareholders’ Agreement, founders should understand the commercial principle being accepted.

A vague statement such as:

“Customary Good Leaver/Bad Leaver provisions shall apply.”

can be dangerous.

What is “customary” for the investor may not be acceptable to the founder.

Board Composition

The term sheet should generally identify proposed board structure.

For example:

Five-member board:

• two founder nominees,
• two investor nominees,
• one independent member.

Or:

Three-member board:

• two founder nominees,
• one investor nominee.

Board structure can significantly affect control.

Founders should not focus only on ownership percentage.

A 20% investor with disproportionate board rights may exercise substantial influence.

Board Observer Rights

An investor may request:

• a board seat, or
• observer rights.

A board observer may attend meetings and receive information without formally voting.

The term sheet should clarify:

• appointment rights,
• access to information,
• confidentiality, and
• circumstances where the observer may be excluded.

Reserved Matters

The investor may require consent over specified decisions.

These are often called:

• reserved matters,
• protective provisions, or
• investor consent matters.

Examples may include:

• capital increases,
• debt above a threshold,
• acquisitions,
• sale of major assets,
• changes in business,
• related-party transactions,
• senior executive appointments,
• founder salaries,
• IP transfers,
• company sale, and
• liquidation.

Reserved matters can significantly restrict founder control.

Avoid Overly Broad Reserved Matters

A startup should remain capable of operating efficiently.

If investor consent is required for:

• hiring ordinary employees,
• signing normal customer contracts,
• routine spending,
• minor product decisions,

the company may become impossible to manage.

Reserved matters should generally focus on major strategic or financial decisions.

Thresholds should be defined where appropriate.

For example:

Borrowing above USD 500,000 requires investor consent.

This is more practical than requiring approval for every bank facility.

Information Rights

The term sheet may grant investors rights to receive:

• monthly management accounts,
• quarterly financial statements,
• annual budgets,
• KPI reports,
• audited financial statements,
• business plans, and
• other company information.

Founders should ensure that reporting obligations are realistic.

An early-stage startup with five employees may not have the resources to produce institutional-level reporting every week.

Information rights should reflect the company’s stage.

Pre-Emption Rights

The investor may request the right to participate in future share issuances.

This allows the investor to maintain its ownership percentage.

For example:

Investor owns 20%.

The company raises Series B.

Without participation, investor may fall to 15%.

A pre-emption or pro rata right may allow the investor to invest additional capital and remain at 20%.

The term sheet should clarify the scope and exceptions.

Super Pro Rata Rights

Some investors request the right to invest more than their existing proportional share in future rounds.

This allows them to increase ownership.

Founders should consider whether super pro rata rights could make later financing more difficult by reducing available allocation for new investors.

Right of First Refusal

A term sheet may provide the investor with a right of first refusal over founder share transfers.

If a founder receives an offer from a third party, the investor may have the right to purchase the shares on equivalent terms.

This can protect the existing cap table but may also restrict founder liquidity.

Founder Lock-Up

Investors commonly want founders to remain committed.

The term sheet may therefore prohibit founders from selling shares for a defined period.

For example:

Founders may not transfer shares for three years following Closing except for permitted transfers.

Founders should negotiate exceptions for:

• approved secondary transactions,
• estate planning,
• holding companies, or
• company exits.

Tag-Along Rights

Tag-along rights protect minority investors if founders sell control.

For example:

Founder owns 60%.

Investor owns 20%.

Other shareholders own 20%.

If the founder sells the controlling 60% to a third party, the investor may have the right to participate in the sale.

The term sheet should clarify:

• threshold,
• proportional or full participation,
• permitted exceptions, and
• pricing treatment.

Drag-Along Rights

Drag-along rights help facilitate a company sale.

Suppose shareholders holding 80% approve an acquisition.

The buyer wants 100%.

A shareholder owning 20% refuses.

A properly structured drag-along mechanism may require that shareholder to sell.

The term sheet should establish:

• triggering threshold,
• investor consent,
• minimum transaction requirements where applicable, and
• equal treatment principles.

Founder Secondary Sales

The term sheet may permit founders to sell a small percentage of existing shares as part of the investment.

For example:

Investment: USD 5 million

Primary investment into company: USD 4.5 million

Founder secondary sale: USD 500,000

The founder receives limited personal liquidity.

Institutional investors may permit secondary sales where founders have worked for many years without meaningful compensation.

However, excessive founder liquidity may concern investors.

Conditions Precedent

A term sheet may identify conditions that must be completed before closing.

Examples include:

• satisfactory legal due diligence,
• satisfactory financial due diligence,
• investor investment committee approval,
• conversion to an A.Ş.,
• IP transfer,
• regulatory approval,
• restructuring founder equity,
• creation of an ESOP pool, and
• execution of final documentation.

Founders should avoid conditions that give the investor unlimited discretion.

For example:

Investment is conditional upon Investor being satisfied in its sole discretion with all aspects of the Company.

Such language may provide very broad exit rights.

“Satisfactory Due Diligence”

Many term sheets state that investment is conditional upon satisfactory due diligence.

Founders should understand that due diligence may allow the investor to withdraw or renegotiate if material problems are identified.

Where possible, the parties may discuss the material areas of concern in advance.

Transparency reduces the risk of late-stage renegotiation.

Investment Committee Approval

Venture capital professionals negotiating the term sheet may not have final investment authority.

The investment may remain subject to approval by the fund’s:

• investment committee,
• board,
• partners, or
• another internal body.

Founders should ask whether the term sheet has already received internal approval.

Otherwise, they may sign exclusivity while the investor still lacks authority to proceed.

Financing Condition

Some investors may need to obtain financing themselves.

A founder should be cautious if the investor’s obligation is conditional upon the investor raising funds from another source.

A venture capital fund with committed capital presents a different closing risk from a special-purpose vehicle still trying to raise the investment amount.

Long-Stop Date

A term sheet or subsequent investment agreement may include a long-stop date.

This is the final date by which closing must occur.

If conditions are not satisfied by that date, the parties may terminate the transaction.

A long-stop mechanism prevents negotiations from remaining open indefinitely.

Term Sheet Expiry Date

A term sheet may itself expire if not signed by a specified date.

For example:

This Term Sheet shall automatically lapse unless executed by 5:00 p.m. on 30 September.

Investors use expiry dates to create deal certainty.

Founders should ensure they have sufficient time for legal review before signing.

No Obligation to Complete the Investment

A well-drafted non-binding term sheet usually contains explicit language stating that neither party is required to complete the investment until definitive agreements are executed.

For example:

Except for the provisions expressly identified as binding, neither party shall have any obligation to consummate the Proposed Transaction unless and until definitive transaction documents have been executed.

This helps distinguish preliminary negotiations from the final investment commitment.

Agreement to Negotiate in Good Faith

Some term sheets include a clause requiring the parties to negotiate definitive documents in good faith.

This concept should be approached carefully.

What constitutes:

• good faith negotiation,
• permitted changes,
• unjustified withdrawal

may become controversial.

The parties should avoid language creating uncertainty about whether they are actually obligated to complete the transaction.

Pre-Contractual Liability

Even where no final investment agreement is completed, negotiations may still raise questions of pre-contractual responsibility under general legal principles.

Parties involved in serious negotiations should act consistently with good faith.

Potential issues may arise where one party:

• deliberately provides false information,
• conceals material facts,
• misuses confidential information, or
• causes the other party to incur substantial costs through clearly abusive conduct.

The absence of a final contract does not necessarily mean all conduct during negotiations is legally irrelevant.

Misrepresentation During Term Sheet Negotiations

Founders should ensure that information supplied to investors is accurate.

For example, founders should not intentionally exaggerate:

• revenue,
• customer numbers,
• ownership,
• intellectual property,
• contracts,
• regulatory status, or
• financial performance.

An investor may rely on these statements when deciding to enter exclusivity or incur diligence expenses.

Serious misrepresentations may create legal consequences independently of whether the investment closes.

Investor Confidentiality During Due Diligence

The startup will often disclose sensitive materials after signing the term sheet.

Confidentiality provisions should therefore apply not only to the investor entity but also, where appropriate, to:

• employees,
• partners,
• lawyers,
• accountants,
• consultants, and
• financing sources.

The investor should remain responsible for ensuring that authorized recipients respect confidentiality obligations.

Strategic Investors and Competitors

Special caution is required where the potential investor is also:

• a competitor,
• potential competitor,
• major supplier, or
• important customer.

The startup may reveal commercially sensitive information during due diligence.

The term sheet should therefore address:

• restricted information,
• clean teams,
• customer data,
• pricing information,
• source code access, and
• use restrictions.

A failed strategic investment should not leave a competitor with unrestricted access to the startup’s business secrets.

Term Sheets and Turkish Competition Law

Where the investor and startup operate in related markets, information exchange may raise competition law concerns.

The parties should avoid unnecessary disclosure of competitively sensitive information such as:

• future pricing,
• customer-specific pricing,
• strategic market allocation,
• detailed competitor plans, or
• other sensitive commercial data.

Due diligence procedures may need to limit access.

Term Sheets and Turkish Corporate Law

A term sheet cannot itself automatically complete a capital increase in a Turkish company.

Even if the parties agree that:

Investor shall acquire 20% of the Company,

the actual acquisition may require:

• corporate resolutions,
• capital increase procedures,
• amendments to Articles of Association,
• subscription documentation,
• payment,
• registration, and
• updates to corporate records.

The term sheet establishes commercial intent.

The corporate implementation must comply with Turkish law.

Term Sheet for an A.Ş.

For an Anonim Şirket, the term sheet may contemplate:

• newly issued shares,
• privileged share groups,
• board nomination rights,
• capital increase,
• registered capital mechanisms,
• employee participation, and
• future financing.

These arrangements must later be translated into appropriate Turkish corporate documentation.

Term Sheet for an Ltd. Şti.

A Limited Şirket investment may require:

• capital increase,
• share transfer,
• amendments to the articles,
• shareholder approvals, and
• other formalities.

Because Ltd. Şti. share transfer mechanics are more formal, founders expecting institutional financing should determine whether restructuring into an A.Ş. is required before closing.

The term sheet may expressly make such conversion a condition precedent.

Foreign Investors

Where the investor is foreign, the term sheet may also need to consider:

• investment currency,
• foreign corporate documents,
• apostille or legalization,
• beneficial ownership information,
• Turkish tax identification,
• regulatory requirements,
• foreign exchange issues, and
• transaction timetable.

A foreign investor should not assume that signing an English-law term sheet eliminates Turkish closing formalities.

Term Sheet Currency

Startup investment term sheets often state valuation and investment in:

• USD,
• EUR, or
• another foreign currency.

However, the final corporate implementation in Turkey may require careful coordination concerning:

• Turkish lira capital,
• exchange rates,
• subscription price,
• share premium, and
• accounting treatment.

The term sheet should provide sufficient flexibility for legally compliant implementation.

Share Premium

An investor may pay substantially more than the nominal value of newly issued shares.

For example:

Nominal value of new shares: TRY 250,000

Investment amount: USD 3 million

The transaction may need to distinguish between:

• nominal capital amount, and
• share premium.

The term sheet may summarize the economic result, while final documents handle the precise corporate mechanism.

Convertible Investment Term Sheets

A startup may negotiate a term sheet for a:

• convertible loan,
• convertible note,
• SAFE-style investment, or
• other future equity instrument.

The term sheet may include:

• investment amount,
• interest,
• maturity,
• valuation cap,
• discount,
• qualified financing threshold,
• conversion events,
• exit treatment, and
• repayment rights.

These terms can create substantial future dilution.

Founders should model the conversion before signing.

Valuation Cap

A convertible term sheet may specify a valuation cap.

Example:

Investment: USD 500,000

Valuation cap: USD 5 million

Next financing valuation: USD 10 million

The early investor may receive equity calculated using the more favorable capped valuation, depending on the agreed mechanics.

This may give the investor significantly more shares than an investment at the new round price.

Discount

A convertible investor may also receive a conversion discount.

For example:

20% discount.

If new investors pay USD 10 per share, the convertible investor may effectively convert at USD 8 per share.

The term sheet should clarify whether the investor receives:

• the discount,
• the valuation cap, or
• whichever produces the better result.

Most Favored Nation Clause

An early investor may request an MFN provision.

If the startup later issues another convertible instrument on more favorable terms, the first investor may be entitled to adopt those improved terms.

The provision should define which later terms are included.

An overly broad MFN clause can complicate future fundraising.

Confidentiality of the Term Sheet Itself

The parties may want the term sheet and valuation to remain confidential.

Disclosure of financing terms may:

• affect future investor negotiations,
• reveal valuation,
• create employee expectations,
• influence competitors, or
• damage the transaction if closing fails.

The confidentiality clause may therefore cover both:

• company information, and
• the existence and terms of the proposed investment.

Public Announcements

The term sheet may prohibit either party from publicly announcing the transaction before closing without mutual consent.

This can prevent situations where a startup announces:

“We raised USD 5 million!”

before the investment has legally closed.

Premature announcements can create reputational problems if the transaction later fails.

Termination of Binding Clauses

The term sheet should clarify how long binding obligations remain in force.

For example:

• exclusivity may last 45 days,
• confidentiality may last three years,
• governing law may survive termination,
• expense provisions may continue after negotiations end.

Not every clause should terminate automatically when the term sheet expires.

What Should Founders Negotiate Most Carefully?

Founders should pay particular attention to:

1. valuation,
2. fully diluted investor ownership,
3. option pool treatment,
4. liquidation preference,
5. anti-dilution,
6. founder vesting,
7. board control,
8. reserved matters,
9. drag-along rights,
10. founder lock-up,
11. exclusivity,
12. investor legal costs,
13. conditions precedent,
14. investor internal approval, and
15. whether commercial terms are binding or non-binding.

These provisions can shape the entire financing round.

The Highest Valuation May Not Be the Best Term Sheet

Consider two competing offers.

Investor A

Pre-money valuation: USD 15 million
Investment: USD 3 million
2x participating liquidation preference
Full ratchet anti-dilution
Two investor board seats
Extensive veto rights

Investor B

Pre-money valuation: USD 12 million
Investment: USD 3 million
1x non-participating liquidation preference
Weighted average anti-dilution
One investor board seat
Limited strategic veto rights

Investor A offers the higher headline valuation.

However, Investor B may provide a more founder-friendly economic and governance package.

Founders should therefore compare complete term sheets rather than valuation alone.

Term Sheet Exit Waterfall Modeling

Before signing, founders should model what happens if the startup is sold for:

• USD 5 million,
• USD 10 million,
• USD 25 million,
• USD 50 million,
• USD 100 million.

The model should consider:

• liquidation preference,
• participation,
• option pool,
• investor ownership,
• founder dilution, and
• convertible instruments.

This can reveal provisions that appear minor but have enormous economic consequences.

Term Sheet Cap Table Modeling

Founders should also prepare a pro forma cap table showing:

Before Investment

Founder A
Founder B
Existing Investors
Option Holders

After Option Pool Expansion

Adjusted founder percentages.

After Convertible Conversion

Adjusted ownership.

After New Investment

Final fully diluted ownership.

Every founder should know their exact post-closing percentage.

Common Term Sheet Mistakes

Signing Without Legal Review

Founders assume the document is non-binding and therefore harmless.

Focusing Only on Valuation

Governance and liquidation rights may matter more.

Accepting Long Exclusivity

The startup becomes trapped if the investor moves slowly.

No Cap on Investor Legal Fees

The startup may become responsible for substantial transaction costs.

Unclear Option Pool Treatment

Founders experience unexpected dilution.

Vague Founder Vesting

The investor later proposes aggressive terms.

“Customary” Investor Rights

The word “customary” can hide significant disagreement.

Excessive Reserved Matters

Founders lose operational flexibility.

No Investor Approval Confirmation

Founders enter exclusivity before the investor’s committee approves the deal.

Ignoring Liquidation Preference

Exit economics may be materially worse than expected.

Ignoring Anti-Dilution

A future down round may severely dilute founders.

No Termination Mechanism

Negotiations remain open unnecessarily.

Using Foreign Templates Without Turkish Adaptation

Corporate implementation may not work as intended.

Term Sheet Checklist for Turkish Startups

Before signing, founders should confirm:

• company identity,
• investor identity,
• investment amount,
• pre-money valuation,
• post-money valuation,
• investor percentage,
• fully diluted capitalization,
• outstanding convertibles,
• option pool size,
• option pool timing,
• share class,
• liquidation preference,
• participating or non-participating preference,
• anti-dilution,
• board representation,
• observer rights,
• reserved matters,
• founder vesting,
• vesting credit,
• Good Leaver/Bad Leaver treatment,
• founder lock-up,
• secondary sale rights,
• pre-emption,
• pro rata rights,
• ROFR,
• drag-along,
• tag-along,
• information rights,
• due diligence,
• conditions precedent,
• investment committee approval,
• exclusivity period,
• confidentiality,
• transaction costs,
• governing law,
• dispute resolution,
• expiry date,
• binding clauses, and
• expressly non-binding clauses.

The document should clearly distinguish between the two categories.

Practical Example

Assume a Turkish SaaS startup is raising Series A financing.

Current ownership:

Founder A: 55%
Founder B: 35%
Seed Investor: 10%

The VC offers the following term sheet:

Investment: USD 4 million

Pre-money valuation: USD 12 million

Investor post-money ownership: 25%

ESOP: 10% post-closing pool

Liquidation preference: 1x non-participating

Anti-dilution: broad-based weighted average

Board: two founders, one VC nominee

Reserved matters: investor consent for major corporate decisions

Founder vesting: remaining three years with credit for one year already served

Exclusivity: 45 days

Confidentiality: binding

Transaction costs: company pays investor legal fees capped at USD 20,000 upon closing

All other commercial provisions: expressly non-binding until definitive agreements are executed.

This is a relatively clear structure.

The founders know:

• which economic terms form the basis of the investment,
• which obligations are immediately binding,
• how long they are restricted from negotiating elsewhere, and
• that the investment itself remains conditional upon final documentation.

Practical Example: Dangerous Term Sheet

Consider another term sheet:

Investment: USD 2 million

Valuation: “approximately USD 10 million”

Option pool: “customary employee pool”

Liquidation preference: “market standard”

Anti-dilution: “customary protection”

Founder vesting: “standard VC vesting”

Investor rights: “customary veto rights”

Exclusivity: 120 days

Investor costs: “all reasonable legal and advisory fees”

Due diligence: “to Investor’s sole satisfaction”

This document leaves numerous critical issues undefined while strongly restricting the startup.

Founders may later discover that:

• “customary” means 15% option pool,
• liquidation preference means participating preference,
• anti-dilution means full ratchet,
• vesting resets for four years,
• investor veto rights are extremely broad,
• legal fees are substantial.

Important economic provisions should be negotiated rather than deferred through vague language.

Can Founders Negotiate a Term Sheet?

Absolutely.

A term sheet is not something founders simply receive and accept.

Founders may negotiate:

• valuation,
• dilution,
• board rights,
• preferences,
• option pools,
• exclusivity,
• legal fees,
• vesting,
• information rights, and
• future financing rights.

The strength of the negotiation position may depend on:

• startup traction,
• competing investor interest,
• cash runway,
• investor demand,
• market conditions, and
• founder experience.

A startup with multiple investment offers generally has greater bargaining power.

Should Founders Sign Quickly?

Investors may sometimes request rapid execution.

Founders should avoid unnecessary delay but should not sign without understanding the economic and legal implications.

A term sheet can determine the framework for a transaction worth millions.

Taking time for:

• legal review,
• cap table modeling, and
• exit waterfall analysis

is generally prudent.

What Happens After the Term Sheet?

After signing, the investment process typically proceeds to:

1. legal due diligence,
2. financial and tax due diligence,
3. definitive document drafting,
4. corporate restructuring where necessary,
5. negotiation of investment terms,
6. satisfaction of conditions precedent,
7. corporate approvals,
8. capital increase or share transfer, and
9. closing.

The term sheet becomes the commercial reference point for these negotiations.

Can Final Documents Differ From the Term Sheet?

Yes.

The final documentation will usually contain significantly more detail.

Certain terms may also change because of:

• due diligence findings,
• legal implementation requirements,
• tax advice,
• regulatory requirements, or
• further commercial negotiations.

However, substantial changes to key terms should generally be identified and negotiated openly.

The term sheet should reduce uncertainty, not merely postpone every significant issue.

Why Turkish Legal Review Is Important

Many startup term sheets originate from international VC practice.

They may use concepts developed under:

• Delaware law,
• English law,
• Silicon Valley financing standards, or
• international venture capital templates.

Terms such as:

• preferred shares,
• liquidation preference,
• conversion,
• reverse vesting,
• drag-along,
• anti-dilution, and
• SAFE

cannot always be implemented in a Turkish company exactly as written.

The economic objective must be translated into corporate mechanisms compatible with Turkish law.

This is particularly important where the startup is incorporated as:

• an A.Ş., or
• an Ltd. Şti.

The final transaction documents should ensure that the rights described in the term sheet can actually be implemented.

Conclusion

A startup term sheet is one of the most important documents in an investment process.

It establishes the commercial framework for negotiations before the parties prepare the final investment documentation.

Under Turkish law, a term sheet is not automatically entirely binding or entirely non-binding.

Its legal effect depends on:

• the wording,
• the intention of the parties,
• the nature of individual provisions, and
• applicable contract law principles.

Startup term sheets frequently provide that commercial investment terms are non-binding while certain provisions are immediately binding.

Binding provisions commonly include:

• confidentiality,
• exclusivity,
• transaction costs,
• governing law,
• dispute resolution, and
• certain due diligence obligations.

Founders should therefore never sign a term sheet on the assumption that:

“It is only a preliminary document.”

Even non-binding provisions can create strong commercial expectations and determine the framework for final negotiations.

Founders should carefully review:

• valuation,
• fully diluted ownership,
• employee option pools,
• liquidation preference,
• anti-dilution,
• board rights,
• reserved matters,
• founder vesting,
• drag-along,
• tag-along,
• future financing rights,
• exclusivity, and
• investor expenses

before signing.

The most important question is not simply whether the term sheet is binding.

The more useful questions are:

Which clauses are binding?

Which clauses are non-binding?

What economic position will the founders have if the transaction closes?

How easily can either party walk away?

What restrictions apply while negotiations continue?

Can the proposed investor rights actually be implemented under Turkish corporate law?

A carefully negotiated term sheet can make the subsequent investment process faster and more predictable.

A poorly drafted term sheet can create uncertainty, founder dilution, excessive investor control and difficult renegotiations.

For startups seeking angel or venture capital investment in Turkey, the term sheet should therefore be treated as a serious transaction document from the moment negotiations begin.

Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal, tax, financial or investment advice. The binding effect of a term sheet depends on its specific wording, the intention of the parties, applicable law and the circumstances of the transaction. Startup founders and investors should obtain professional legal advice before signing a term sheet, letter of intent, memorandum of understanding or other preliminary investment document in Turkey.