There’s a moment in every founder’s journey when the dream stops being theoretical and becomes real enough to touch. It usually happens when someone—an investor, a strategic buyer, a private equity group—slides a document across the table. Sometimes it’s called a term sheet. Sometimes it’s labeled “LOI.” And if you’re going through this for the first time, you’d be forgiven for thinking they’re interchangeable.
They’re not.
A term sheet and a Letter of Intent might look similar at a glance. Both sketch the outline of a potential deal. Both are non-binding in most ways. Both feel like the first real signal that this might actually happen. But beneath the surface, they live in different worlds. They communicate different intentions. And they set the tone—sometimes even the trajectory—of what’s ahead.
I’ve signed both across my career. I’ve had term sheets that opened doors and LOIs that unlocked exits. I’ve also had documents that looked promising on page one but blew up by page six. When I wrote The Entrepreneur’s Exit Playbook (https://amzn.to/4n6Djb8), I tried to teach founders something I had learned the hard way: understanding these documents isn’t a legal formality. It’s leverage. It’s clarity. It’s control.
And if you’ve listened to the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/) long enough, you know how often Ed and I come back to that word: control. Because deals unravel when founders cede it too early.
So let’s break this down—not like a lawyer would, but like a founder who’s survived the rollercoaster.
Why These Two Documents Feel Similar—Until They Don’t
A term sheet and an LOI both function as an agreement-in-principle. They’re the buyer saying, “We’re serious enough to put this on paper.” But the context determines what each really means.
A term sheet is usually associated with venture capital or minority equity investment. It’s shorter, more high-level, and focused on the economics of the investment: valuation, ownership, investor rights, governance.
An LOI is almost always associated with the acquisition of a company. It’s not about investing in what you’re building—it’s about buying the whole damn thing (or a majority of it). It’s more detailed. The stakes are higher. And the LOI starts the countdown to due diligence.
One is about growth.
The other is about transition.
When I received my first term sheet at Pepperjam, it was exciting, flattering, and affirming—but it wasn’t life-changing. When I received my first LOI, everything shifted. I could feel the entrepreneurial equivalent of gravity changing in the room. I was seconds away from the final stretch of an emotional marathon I didn’t realize I’d been running.
What’s Actually Inside a Term Sheet
A term sheet lays out the economics of investment more than the mechanics of an acquisition. It answers questions like:
How much money is being invested?
At what valuation?
For what percentage of the company?
With what protections for the investor?
But it usually stops there. Here’s what term sheets typically cover, in founder-friendly language:
1. Valuation
Pre-money and post-money clarity.
This is the number everyone obsesses over—and the number you shouldn’t let define you.
2. Investment Amount
How much they’re putting in and when it arrives.
3. Equity Stake
What percentage of your company you’re giving up.
4. Liquidation Preferences
How investors get paid back—and in what order—when there’s an exit.
5. Board Structure
Who gets what seat, and therefore, who gets what voice.
6. Voting Rights / Protective Provisions
Which decisions require investor approval.
7. Founder Vesting
A big one. Investors want founders locked in for the journey.
8. Employee Option Pool
Investors often require an expanded pool—sometimes at your expense.
What’s important to understand is that a term sheet is not trying to close the deal. It’s trying to define the power structure of the deal.
The pressure is lower. The speed is different. And the energy is collaborative because both sides expect to keep working together for a long time.
What’s Inside an LOI (Letter of Intent)
If a term sheet is a handshake, an LOI is the beginning of the interrogation.
Not in a hostile sense—but in a “the next 90 days will determine everything” sense.
When you sign an LOI, you are officially entering the M&A arena. That means:
Due diligence starts.
The buyer gets access to your books, people, systems, and skeletons.
The exclusivity clock begins ticking.
And unlike a term sheet, an LOI is far more detailed. It’s not just “Here’s what we’d invest.” It’s “Here’s exactly how we’ll buy you.”
A strong LOI includes:
1. Purchase Price and Structure
Cash at close.
Stock.
Earnouts.
Seller notes.
Holdbacks.
This is where founders make or lose millions before diligence even begins.
2. Deal Type
Asset sale vs. stock sale.
Tax implications.
Risk allocation.
Legal structure.
3. Working Capital Targets
One of the biggest “founder regrets” I see.
Miss this, and buyers quietly reclaim a chunk of your purchase price without ever renegotiating.
4. Due Diligence Scope and Timeline
What they’ll review, for how long, and using which process.
5. Exclusivity (No-Shop Clause)
Once you sign, you can’t date other buyers.
This matters. Negotiate it carefully.
6. Employment / Transition Expectations
Will you stay?
How long?
Under what compensation?
Under what authority?
7. Reps and Warranties Framework
Not the full list—just the expectation.
But even the preview tells you how risky diligence will be.
8. Closing Conditions
Everything that must be true for the buyer to close.
Notice the pattern:
The term sheet is about economics.
The LOI is about ownership, risk, and control.
Why Founders Mistake One for the Other
Founders often see the LOI as a slightly longer term sheet. They skim it. They celebrate it. They think the hard part is over.
It isn’t. It’s just beginning.
When I sold Pepperjam, my LOI felt exciting. Like everything was accelerating. But it also revealed something deeper: if you misunderstand what you’re signing, you’re negotiating blindfolded.
I’ve watched founders misread an LOI and walk into diligence like deer in headlights. I’ve seen others assume a term sheet was “basically a done deal”—only to discover the investor expected a level of governance they never imagined.
This is why I tell founders on our Legacy Advisors Podcast that the LOI is the most important document in the entire M&A process. Not the closing documents. Not the APA. Not even the diligence reports. The LOI sets the architecture of the final deal long before lawyers ever get involved.
How Each Document Changes Your Life as a Founder
Signing a term sheet does not change your day-to-day life.
Signing an LOI absolutely does.
A term sheet means you’re about to take on capital and partnership.
An LOI means you’re about to take on scrutiny and transition.
After the LOI is signed, your calendar fills.
Your stress rises.
Your team feels your absence.
Your emotions oscillate between confidence and chaos.
Ed and I talk often about the “deal fog” on the podcast. It’s that period where you’re technically still running your company, but mentally living inside a data room. The LOI is what triggers that fog.
A term sheet won’t do that to you.
The Emotional Divide Between Term Sheets and LOIs
Here’s the truth nobody tells founders:
A term sheet feels like a victory lap.
An LOI feels like a countdown.
One represents possibility.
The other represents accountability.
You sign a term sheet when you feel like you’re climbing.
You sign an LOI when you feel like you’re crossing.
One is about expansion.
One is about the beginning of letting go.
When I look back—both in my own exits and in the dozens of deals Legacy Advisors has guided for clients—the emotional weight of the LOI is always heavier. It’s not bad. It’s just real. Because the LOI introduces uncertainty, risk, deadlines, and the possibility of losing something you’ve poured your soul into.
But that’s why preparation matters.
Why discipline matters.
Why readiness matters.
It’s why I wrote The Entrepreneur’s Exit Playbook in the first place.
The Real Question Founders Should Ask
If you’re asking, “What’s the difference between a term sheet and an LOI?”—you’re asking the wrong question.
You should be asking:
What intentions does this document signal?
What promises am I making?
What leverage am I giving away?
What story is this telling about who controls the next chapter?
A term sheet says:
“We want to invest in your future.”
An LOI says:
“We want to own your future.”
When you understand that distinction, everything becomes clearer.
Find the Right Partner to Help Sell Your Business
If you’re staring at a term sheet or LOI and wondering what it really means for your future, you shouldn’t navigate that moment alone. The right advisor can help you protect value, maintain leverage, and make decisions you’ll be proud of years from now.
Frequently Asked Questions About Term Sheets vs. LOIs
1. How do I know whether I should sign a term sheet or hold off for a better offer?
Founders often see a term sheet as a trophy—as validation that someone finally recognizes what they’ve built. But the truth is, the first term sheet is rarely the best term sheet. When I talk about this on the Legacy Advisors Podcast, I remind founders that a term sheet is not the finish line; it’s the beginning of a negotiation about power, governance, and long-term control of your company. Before you sign anything, you need clarity around valuation, dilution, board structure, and rights that might limit your ability to operate freely. In The Entrepreneur’s Exit Playbook, I write about the importance of maintaining leverage during early negotiations. And leverage comes from options. Unless you’re under extreme time pressure or capital starvation, it’s usually better to explore multiple conversations before locking into one investor’s vision. A term sheet should feel like the right direction—not the only direction.
2. What happens immediately after I sign an LOI, and why do founders describe it as overwhelming?
The moment an LOI is signed, the energy of the deal shifts dramatically. Before the LOI, everything is theoretical—numbers and concepts thrown around on Zoom calls. After the LOI, it becomes real. Due diligence begins. The exclusivity clock starts ticking. Buyers request documents you haven’t looked at in years. Your CPA is suddenly your new best friend. And your team—who may not even know the company is in play—starts wondering why you’ve disappeared into the digital ether of the data room. On the Legacy Advisors Podcast, Ed and I call this “deal fog,” the blurry mental state founders enter when they’re still running the business but emotionally living inside diligence. In The Entrepreneur’s Exit Playbook, I explain how the LOI stage is where deals are won or lost—not because of the numbers, but because of the founder’s preparation, discipline, and emotional stamina. It’s overwhelming because everything is at stake, and every weakness is exposed. But with the right advisor, you never have to face that intensity alone.
3. Can a term sheet or LOI be binding, and how worried should I be about that?
Both term sheets and LOIs are typically non-binding—but that word can be misleading. While the economics and deal terms might not be legally enforceable, certain provisions almost always are, especially in an LOI. Exclusivity clauses, confidentiality, governing law, and sometimes even break-up fees can be binding. I’ve seen founders sign LOIs casually, thinking they can “always shop around,” only to learn they can’t. Not without risking legal exposure or damaging their reputation in the investor community. In The Entrepreneur’s Exit Playbook, I stress that founders need to read these documents not as legal paperwork but as instruments of leverage. On the podcast, we often talk about how exclusivity—while standard—must be carefully negotiated. Shorter timelines, milestones, and clear diligence expectations protect you from being trapped. So yes, non-binding documents can still carry very real obligations. Treat them accordingly.
4. What’s the biggest mistake founders make when reviewing a term sheet or LOI?
By far the biggest mistake is focusing only on the headline number. Whether it’s the valuation in a term sheet or the purchase price in an LOI, founders tend to anchor emotionally to that number. But deals aren’t defined by the headline—they’re defined by the fine print. I’ve lived this personally. Early in my career, I obsessed over valuation while ignoring liquidation preferences, control provisions, and working capital requirements—until I learned the hard way how much value can be buried in structure. On the Legacy Advisors Podcast, Ed and I often explain that a great-looking offer can quietly siphon millions away through adjustments, earnouts, holdbacks, and working capital targets. The Entrepreneur’s Exit Playbook drives home this point: founders must evaluate deals holistically, not emotionally. The biggest mistake is falling in love with the number and overlooking the architecture.
5. When should I bring in an M&A advisor to help with a term sheet or LOI?
Much earlier than most founders think. Founders tend to treat advisors like emergency room surgeons—they call us when something is broken or bleeding. But the best outcomes happen when advisors are involved before the deal gets complicated. A term sheet is the moment a founder needs perspective. An LOI is the moment you need protection. The architecture of the deal gets set long before lawyers draft final documents. At Legacy Advisors, we regularly help founders negotiate their LOIs before signing, because we know that one poorly framed clause can cost them seven figures later. In The Entrepreneur’s Exit Playbook, I emphasize that your advisory team is not a luxury—it’s armor. When you bring advisors in early, you don’t just get better terms; you get clarity, leverage, and peace of mind. And in a process as intense as M&A, those three things are priceless.