Letter of Intent vs. Term Sheet: Which One to Sign First in a US Deal in 2026

That said, the two documents overlap enough that practitioners regularly confuse them, misuse them, or skip one entirely and pay for it later.

What each document actually does

A letter of intent (LOI) is a short document — usually two to five pages — that signals genuine interest in a transaction and sets the stage for due diligence. It is almost always non-binding on the core deal terms, but certain provisions (confidentiality, exclusivity, expense allocation) are written to be expressly binding. Courts across the US have repeatedly enforced those carved-out binding provisions even when the underlying deal fell apart, so the language matters more than most founders realize.

A term sheet serves a different function. Instead of expressing intent, it summarizes the specific commercial terms the parties have already agreed on in principle — valuation, security type, board composition, liquidation preferences, anti-dilution provisions, and the like. Term sheets are standard in venture capital and private equity deals, where the economic complexity warrants a standalone summary before a 200-page purchase or investment agreement is drafted.

In M&A practice, the LOI often contains enough commercial detail that a separate term sheet is redundant. In venture deals, the sequence tends to run: preliminary conversation, term sheet, then perhaps an LOI for exclusivity.

Binding vs. non-binding: where parties get into trouble

The biggest source of litigation around LOIs is the assumption that "non-binding" means entirely without legal consequence. It does not.

Under general US contract law, courts look to whether parties manifested mutual assent and whether consideration was exchanged. An LOI that contains definitive language — "Buyer agrees to pay $4.5 million" or "Seller shall provide access to all financial records by July 15" — can be read as an enforceable obligation even when the document is labeled non-binding. Teachers Insurance & Annuity Ass'n of America v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987) is widely cited for the proposition that a preliminary agreement to negotiate in good faith can itself be binding.

Best practice: every LOI should contain an explicit section labeled "Binding Provisions" and another labeled "Non-Binding Provisions." Any duty to negotiate exclusively or maintain confidentiality should appear in the binding section, with clear consideration stated. Everything about price, reps and warranties, or deal structure should appear in the non-binding section with language like: "The parties do not intend for this Section to create any binding obligation."

Term sheets carry similar risks. A venture capital term sheet that states "upon execution, the Company shall cease discussions with other investors" creates a binding exclusivity obligation regardless of a general disclaimer at the top.

Exclusivity windows: negotiate them hard

The exclusivity clause — sometimes called a "no-shop" or "standstill" provision — is where both parties have the most leverage before signing anything.

For M&A deals, sellers typically resist exclusivity entirely or cap it at 30 days. Buyers argue for 60 to 90 days to complete due diligence without competition. In practice, US mid-market M&A exclusivity periods in 2026 run 45 to 60 days, with extension mechanics tied to specific diligence milestones.

For early-stage venture deals, a term sheet's no-shop provision commonly runs 30 days, occasionally extended to 45. Lead investors use this window to complete legal and financial diligence and coordinate any co-investors.

A few things to watch:

• Scope: Does exclusivity cover the specific structure proposed, or all deal structures? A broad exclusivity clause prevents the seller from running a competing process even if the buyer pivots to a different acquisition vehicle.
• Automatic extension: Some LOIs include automatic 30-day extensions if the buyer provides written notice. These can leave a seller locked up far longer than intended.
• Break fees: Some LOIs — particularly in real estate and larger M&A deals — pair exclusivity with a break fee (also called a termination fee) payable if the buyer walks away without cause. A break fee between 1% and 3% of deal value is typical in US public company M&A, per customary market practice; private deal break fees vary widely.

M&A vs. investment deals: different documents for different deal types

The document that makes sense depends on the deal type.

In M&A (acquisition of a private company, asset purchase, or merger), the LOI is almost always the first signed document. It covers: purchase price and structure, earnout mechanics if any, exclusivity period, confidentiality obligations, and a high-level list of conditions to closing. After the LOI, the buyer conducts due diligence, then counsel drafts the definitive purchase agreement.

In venture capital and angel investment, the term sheet leads. The National Venture Capital Association (NVCA) publishes model term sheet templates that have become industry standard; most US VC deals use NVCA-compliant terms as a starting point, even if they deviate on specifics. A separate LOI is rarely used in early-stage deals; the term sheet itself includes the exclusivity and confidentiality provisions that an LOI would otherwise carry.

In joint ventures and commercial partnerships, both documents sometimes appear. A short LOI establishes the parties' intent and triggers due diligence; a longer term sheet negotiated shortly after maps out governance, profit sharing, IP ownership, and exit rights before the JV agreement is drafted.

Common mistakes to avoid

1. Signing an LOI with vague exclusivity language. "The parties agree to negotiate exclusively" without a defined end date has been argued to create an open-ended obligation. Always specify a calendar end date, not a rolling period.

2. Treating a term sheet as a formality. Sophisticated counterparties will hold you to term sheet language during definitive agreement negotiations. If the term sheet says "Board shall consist of three directors," pushing for five directors in the purchase agreement without fresh consideration is a hard fight.

3. Omitting confidentiality from the LOI. The Defend Trade Secrets Act (18 U.S.C. § 1836) provides federal trade secret protection, but it applies only after misappropriation. An LOI-level confidentiality clause creates a contractual duty that is far easier to enforce. Some deal teams rely on a standalone NDA signed even before the LOI — that is the safer sequence.

4. Assuming an LOI locks the price. Non-binding price provisions mean the counterparty can walk away or re-trade on price after diligence reveals problems. Build in a diligence adjustment mechanism if you want price certainty.

5. Skipping legal review to save time. LOIs and term sheets take hours for experienced counsel to review, not weeks. The cost of a mistake at this stage — an inadvertent binding obligation, a missed break fee, or an exclusivity period that expires before diligence is done — routinely runs into six figures.

Practical sequence for a US deal in 2026

1. Non-disclosure agreement. Sign before sharing any confidential information, even in early conversations.
2. Letter of intent. Once both parties are serious, the buyer or investor presents a draft LOI. Negotiate exclusivity, confidentiality, and break fee here.
3. Due diligence. The exclusivity window runs during this phase.
4. Term sheet (if needed). In M&A, this step is often skipped; the LOI contains enough commercial detail. In VC/PE deals, the term sheet may precede the LOI or replace it.
5. Definitive agreements. Purchase agreement, shareholders' agreement, or investment agreement — drafted by counsel based on the LOI and term sheet.

If you are approaching a US business transaction and need a starting document, a well-structured letter of intent is the foundation that keeps both parties aligned through the diligence period.

A note on governing law

Most US LOIs and term sheets specify Delaware law as governing law, even when neither party is incorporated there, because Delaware's corporate law is well-developed and predictable. Parties in California deals sometimes choose California law. The choice matters: Delaware courts have been more willing to enforce good-faith negotiation duties in preliminary agreements, while some other state courts have been more reluctant to imply obligations from non-binding LOIs.

The LOI versus term sheet question does not have one universal answer, but the logic is consistent: identify which document fits your deal type, negotiate the binding provisions deliberately, and do not let the "non-binding" label on commercial terms create a false sense of flexibility on the provisions that are, in fact, binding. In 2026, with deal volumes recovering across US middle-market M&A and early-stage investment activity picking up, getting these foundational documents right from the start is what separates clean closings from expensive renegotiations.