The importance of term sheet review has grown significantly alongside the expansion of the startup ecosystem and investment activity, particularly where transactions involve investors or legal structures originating outside Saudi Arabia. Although a term sheet is commonly described as “non-binding,” practical experience demonstrates that it serves as the primary commercial and legal reference for the transaction, shaping the definitive agreements that follow. Treating a term sheet as a mere formality may expose founders to obligations that become difficult to revise once investment agreements, shareholders’ agreements, and corporate resolutions are implemented.
Within the Saudi market, commercial alignment alone is not sufficient. Term sheet provisions must be legally implementable under Saudi Companies Law and compatible with the company’s legal form—whether a Limited Liability Company (LLC) or a Simplified Joint Stock Company (SJSC). Many term sheets prepared under foreign jurisdictions require local implementation structuring to ensure smooth execution in Saudi Arabia, particularly at the stages of registration, governance, and share issuance.
What You Will Read in This Article
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What a term sheet is and why it represents a turning point in investment transactions
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Whether term sheets are legally binding and which provisions may be enforceable
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How term sheets affect company formation, ownership, and governance
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Key clauses founders must understand before signing
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Why early legal review reduces risk and facilitates transition to definitive agreements
Who We Are
We are Mohammed Almuzayen Law Firm, with more than 15 years of experience in company formation and corporate structuring in Saudi Arabia. We advise founders, investors, and international businesses on selecting the appropriate legal form (LLC, SJSC, Joint Stock Company, or branch of a foreign company), completing incorporation and licensing procedures, drafting articles of association and bylaws, structuring ownership and governance frameworks, and documenting shareholder and board resolutions. We also support restructuring and legal readiness for funding rounds, and assist clients relocating investment structures from foreign jurisdictions by adapting them for enforceability under Saudi law.
To arrange a legal consultation, contact us at 0590098800 (Sunday–Thursday, 9:00 AM–5:00 PM).
term sheet, term sheet review, Riyadh, startup funding, investors, founders, Saudi law, valuation, governance, shareholder agreement, Mohammed Almuzayen Law Firm
Q: What Is a Term Sheet in Investment Transactions?
A: A term sheet is a preliminary document that summarizes the key commercial terms of an investment before executing definitive agreements. It typically includes:
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Investment amount
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Company valuation (pre-money and post-money)
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Investment instrument (equity subscription, convertible instruments, SAFE, etc.)
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Investor rights
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Governance framework (board structure, observer rights, reserved matters)
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Exit and liquidation mechanics
In practice, the term sheet functions as a roadmap for the transaction, with its principles later reflected in investment agreements, shareholders’ agreements, and corporate documentation.
Q: Are Term Sheets Legally Binding?
A: As a general rule, term sheets are non-binding with respect to completing the investment. However, they often contain provisions that may be legally binding, including:
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Confidentiality
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Exclusivity or no-shop clauses
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Allocation of costs and fees
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Governing law and dispute resolution
Even when non-binding, term sheets typically establish the economic and governance foundation of the deal. Once exclusivity applies or negotiations advance, renegotiating core terms becomes significantly more difficult.
Q: How Do Term Sheets Affect Company Formation and Structure?
A: The impact of a term sheet extends beyond fundraising and directly influences company formation and structuring under the Saudi legal framework:
1) Ownership, Capitalization, and Dilution
Valuation and investment size determine post-investment ownership percentages, affecting control, incentives, and future fundraising dynamics.
2) Governance and Decision-Making
Provisions relating to board seats, observer rights, and reserved matters determine who exercises decision-making authority and how operational flexibility is maintained.
3) Legal Implementability Under Saudi Law
Certain international templates require restructuring to ensure enforceability when translated into articles of association, shareholder resolutions, share registers, and issuance mechanisms. A strong term sheet is not one that appears international, but one that can be implemented locally without conflict.
4) Employee Incentives and ESOP Planning
Investor requests for ESOP creation raise critical questions regarding timing, dilution allocation, and long-term founder economics.
Q: Which Clauses Require the Most Attention?
A: Key provisions that often carry significant long-term impact include:
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Valuation and dilution mechanics
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Liquidation preference structures affecting exit proceeds
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Anti-dilution protections, which may be punitive if improperly structured
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Investor veto rights and reserved matters, requiring careful balance
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Exclusivity provisions that may weaken negotiation leverage if excessive
Legal Consultation
For professional legal advice on term sheet review, funding rounds, and investment and shareholders’ agreements, you may contact Mohammed Almuzayen Law Firm to arrange a structured legal consultation prior to signing.
To arrange a legal consultation, contact us at 0590098800 (Sunday–Thursday, 9:00 AM–5:00 PM).
Q: Why Is Legal Review Critical for Transactions Originating from Foreign Jurisdictions?
A: Many transactions begin with term sheets drafted under foreign legal frameworks and are later implemented in Saudi Arabia. This transition requires careful adaptation to ensure that rights, governance mechanisms, and exit provisions can be validly implemented through Saudi corporate documentation and regulatory practice. Early legal review ensures a smooth transition to definitive agreements without gaps or enforceability risks.
Frequently Asked Questions (FAQ)
Can a term sheet be easily amended later?
Core terms often become difficult to renegotiate once exclusivity applies or documentation progresses.
Which clause most commonly affects founders at exit?
Liquidation preference structures.
Is ESOP structuring a minor issue?
No. Timing and dilution allocation directly affect founder economics.
Are all investor veto rights reasonable?
Investor protection should be balanced against operational efficiency.
Conclusion
Term sheet review is not a procedural step—it is the stage at which valuation, dilution, governance, investor rights, and exit mechanics are defined before becoming binding obligations. Early and informed legal review increases enforceability under Saudi law, reduces future disputes, and supports efficient transition to definitive investment and shareholders’ agreements.
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Summary
Term sheet review helps founders understand how valuation, dilution, governance, and investor rights shape investment outcomes before provisions become binding. Although often non-binding, term sheets usually determine the structure of definitive agreements. Early legal review supports enforceability, reduces risk, and enables smooth implementation within the Saudi legal framework.
