The Cost of Customary: Why vague term sheets in Private Equity transactions make expensive definitive agreements
What does it mean to put something in writing? Not the mechanical act of it, not the choice of font or the number of pages, but the deeper commitment that the act itself represents. To write something down is to move it from the realm of intention into the realm of accountability. It is to say: this is what we mean, and we are willing to be held to it.
In a private equity transaction, the term sheet is that moment of reckoning.
The term sheet is not the closing. It is not the definitive agreement. It does not carry the full weight of legal enforceability in most of its clauses. What it carries, instead, is something more fragile and, in many ways, more consequential: the first formal articulation of mutual intent. By the time pen meets paper, a series of conversations has already taken place, initial beliefs have been tested, and both parties have decided, independently and then together, that there is something here worth pursuing. The term sheet is where that implicit understanding is asked to become explicit. And that transition, from the unspoken to the written, is where most deals either gain clarity or begin to quietly unravel.
There is, among practitioners, a perennial debate about length. One school of thought advocates brevity: capture the headline commercial terms, keep the document lean, and let the diligence and the definitive agreements do the heavy lifting. The logic is not without merit. A short term sheet preserves momentum. It gets both parties to the table of serious engagement faster. It signals trust. And in markets where deal velocity matters, the ability to move quickly is its own form of competitive advantage.
However, brevity without precision is not elegance. It is postponement.
Consider what gets deferred when a term sheet is deliberately kept thin. Anti-dilution protection noted as "customary" - but customary by whose interpretation? Full ratchet and weighted average anti-dilution are not stylistic variations of the same idea; they are fundamentally different economic outcomes for the founder, particularly in a down round. "Customary exit rights" is another phrase that travels well in a term sheet and lands badly in a boardroom. A private equity investor seeking a 15% IRR-linked buyback as a fallback exit, upon the failure of a waterfall of preferred exit events, is not being unreasonable by the standards of the asset class. But if that expectation was never named at the term sheet stage, its appearance in the definitive agreements can feel less like a customary provision and more like an ambush.
The same logic applies to reserved matters. "Approval of the business plan" reads, at first glance, as a standard governance safeguard. It is, in practice, a clause whose scope is determined entirely by how "business plan" is defined. Left undefined, it can expand to encompass virtually every operational and strategic decision the company makes. A founder who agreed to investor oversight of the annual plan may find, by the time the shareholders' agreement is being negotiated, that she has agreed to something considerably more pervasive. The fault does not lie with any one party. It lies with the term sheet that chose to name the clause without defining it.
There is a further hazard that deserves attention: the gap between a clause's heading and its operative text. A label is not a definition. A clause titled "Right of First Offer" may, in its body, create an obligation that functions more like a Right of First Refusal, compelling a party to route a third-party offer back to the rights-holder before accepting it. The heading suggests privilege; the text imposes restriction. In a world where parties often rely on clause titles to navigate documents and anchor their understanding of rights, this kind of structural ambiguity is not merely an imprecision. It is a deferred dispute, waiting for the right set of circumstances to surface.
One should think of a term sheet as the architectural blueprint of a building. The blueprint does not describe every pipe, every fitting, every finishing material. But it does establish the load-bearing walls. Change those at the execution stage, and the cost is not just financial. It is structural. What was agreed in spirit must now be renegotiated in letter, and the goodwill that brought two parties to the table begins to calcify into something more adversarial.
This is, ultimately, not a question of document length. A three-page term sheet drafted with precision and shared understanding will serve a transaction better than a twenty-five-page document dense with deliberately vague language. The question is not how much is written, but how much is resolved. A well-drafted term sheet does not defer negotiation; it completes the first and most important round of it. The definitive agreements, ideally, become an extended version of the term sheet, adding mechanics to what the term sheet has already settled in principle.
The spirit of a transaction is, in no small measure, revealed in the way its term sheet is drafted. Parties who approach the document as an opportunity to front-load clarity signal a certain kind of seriousness. Those who treat it as a placeholder, a formality to be signed and forgotten until the lawyers arrive, often discover that the ambiguities they chose not to acknowledge and resolve early have a way of creating friction which stacks up and compounds.
Well begun, as the old wisdom holds, is half done. In private equity, a well-crafted term sheet is not the beginning of the paperwork. It is the beginning of the partnership.
Friction points should be viewed as problems to solve together, not battles to win alone.