In year one the founder signs documents that belong to the company itself. In year two customer and supplier contracts join them. In year three something different reaches the table: the first serious document of a funding round, the term sheet. It is signed on the back of two opposite misconceptions. Founders treat it as the round itself: the valuation is written down, so the deal is done and the lawyers merely tidy up. Across the table sits the comfortable assumption that because the opening line says the document is not binding, nothing in it can bite. Where those two assumptions meet across one table, the negotiation stops moving.
A term sheet is better read as several layers stacked on each other rather than one document. One binds from signature, and breaching it sounds directly in damages. One genuinely does not bind. That layer is a snapshot of the commercial terms that week. The layer in between shifts with how the text was drafted and what the parties did after signing, not with what the heading claims. Disputes almost always come out of that third layer.
Turkish law has no dedicated regime for a term sheet or a letter of intent; the document is read through ordinary contract law. The backbone is Article 29 of the Turkish Code of Obligations (TBK m. 29): agreements to conclude a contract in the future are valid, and save for the exceptions laid down in the laws, the validity of a preliminary agreement (ön sözleşme) depends on the form required for the contract concluded later. Everything practical below follows from those two sentences.
Which clauses actually bind?
Almost every template carries a core whose binding character nobody disputes. These clauses run on a different logic from the commercial terms: not a promise about the future, but a regime operating from signature.
- Exclusivity. The no-shop clause, barring the founder from talking to other investors for a defined period, sits at the centre of that core. Unless its duration, scope and the contacts counting as a breach are spelled out, breach becomes impossible to prove.
- Confidentiality. The existence of the round, the valuation, the founder split and the financials opened in the data room are often more sensitive than what the standalone confidentiality agreement covers; this clause should sit alongside that earlier agreement rather than replace it.
- Cost allocation. Who pays for legal and financial due diligence, what happens if the round never closes, and any cap are settled here. In rounds that fall away, this is usually the only item left unresolved.
- Governing law and dispute resolution. Even where the rest does not bind, the law governing the binding clauses and the forum for arguing about them apply from signature. With a foreign investor, fixing the seat and language of arbitration this early saves weeks later.
What these clauses share is that each creates an obligation making sense on its own even if the main agreement is never concluded. That is the first test we apply to any provision claiming a place on the binding list.
The limits of a “non-binding” heading
The binding-effect reservation at the head of the text is not useless; it is the strongest single piece of evidence of what the parties intended. On its own it is no shield. Whether a document counts as a preliminary agreement is decided on the whole of it and on how the parties behaved, not on its heading. Where the text says it does not bind while its content describes an intention to be bound, a judge or arbitrator resolves the contradiction — and nobody predicts at signature which way that goes.
The behaviour pointing towards an intention to be bound falls into familiar categories: the founder breaking off other conversations at the investor’s request, part of the price paid in advance, the investor joining company decisions before closing, the round announced publicly, drafts produced without departing from the term sheet. None is decisive alone; where several appear together, the argument that the parties were merely recording an intention gets thin.
One technique works in the opposite direction: list the binding clauses one by one at the end and state that nothing outside the list binds. It beats a general “this document is not binding” sentence because it shows which clause sits in which layer, leaving no room for argument. In Series A rounds with an institutional investor, giving that distinction its own section has become the familiar approach.
The threshold for a preliminary agreement
TBK m. 29 treats agreements to conclude a contract in the future as valid. If the parties have agreed the essential elements of the main contract and intend to be bound, the document they signed may be read as a preliminary agreement whatever it is called. The claim in the other party’s hands is then not “compensate my loss” but “conclude the main contract” — an altogether different risk.
The threshold of essential elements sits lower here than founders assume. Once the amount invested, the shareholding issued in return, the class of shares and the timing of payment are on the page, most of the rest — warranties, the indemnity regime, board composition — is technically supplementary. “The remaining terms will be negotiated in the definitive documents” does not always close that gap; a concrete list showing the open matters are genuinely essential is safer.
So the second drafting question is whether the text builds the skeleton of an agreement enforceable on its own. If it does, the precision of the binding-effect reservation becomes vital.
Parallelism of form in practice
The second paragraph of TBK m. 29 offers a protection founders almost never notice: save for the exceptions laid down in the laws, the validity of a preliminary agreement depends on the form required for the contract concluded later. If the underlying transaction carries a formality, so must the preliminary agreement promising it.
The difference shows up most sharply in the choice of company type. In a limited liability company (limited şirket) the transfer of a capital share carries a statutory formality, and it takes effect against the company only with the approval of the general assembly under Article 595 of the Turkish Commercial Code (TTK m. 595). In a joint stock company (anonim şirket), a share transfer is as a rule subject to no such formality. So a term sheet signed as an email attachment, promising shares in a limited liability company, will struggle to survive as a preliminary agreement: the form has not been met. Signed for a joint stock company, the same text has no such defence.
This cuts both ways. In a start-up structured as a limited liability company, the risk of binding by accident is low; but the founder who relies on the investor’s promise and acts on it has no claim founded on a preliminary agreement either. Where the start-up converts to a joint stock company before the round, every sentence deserves more care. The choice reaches the articles of association (esas sözleşme) too, since share classes and privileges can only be structured comfortably in a joint stock company.
Is walking away from negotiations free?
As a rule, yes: nobody can be forced to conclude a contract, and withdrawing is not in itself wrongful. The manner and timing of the withdrawal can still create liability. Where a party has created a legitimate expectation that the contract would be concluded, has let the other side incur costs or turn away other opportunities in reliance on it, then leaves the table without good reason and contrary to the rule of good faith (dürüstlük kuralı), the case is assessed as fault in contractual negotiations (culpa in contrahendo).
The scope of that liability is, as a rule, the loss suffered through relying on the contract being concluded: advisory costs, preparing the data room, the demonstrable consequences of an alternative round let go. What the company would have been worth had the round closed does not belong in that column.
The instrument parties reach for to reduce that uncertainty is the penalty clause (cezai şart): a sum agreed in advance, attached to a breach of exclusivity or to withdrawal without good reason. Two reminders. It does not operate unless the conduct counting as a breach is written out clearly, and a sum found excessive may be reduced. Amounts inflated for deterrent effect tend to backfire.
What we watch for when drafting
- List the binding clauses individually. Leave a closed list at the end and state plainly that no provision outside it binds; a general reservation does not do the same work.
- Give exclusivity an end date and an exit. As important as the period is when it lapses by itself: the investor changing terms unilaterally, or never starting due diligence, are the usual exits.
- Name the closing conditions. A condition as open-ended as “the investor’s internal approvals” suspends the commercial terms entirely; naming the approving body and a longstop date closes that risk.
- Push detail into the definitive documents. Board composition, the veto list, drag-along and tag-along belong in the term sheet at headline level only, the mechanics built into the shareholders’ agreement.
Whether a term sheet binds is a question of drafting rather than of headings. Founder and investor have the same exercise before signing: read the text end to end, mark each clause binding or not, then move every grey line either onto the binding list or expressly outside it as a commercial term. It takes half an hour. Skipped, that text becomes the one document argued over for months where the round never closes.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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