A plain-English guide to heads of terms for commercial contracts

What are heads of terms, actually?

Heads of terms are a short document that sets out the key points of a deal before you draft the full contract. They are sometimes called a memorandum of understanding, a letter of intent, or simply term sheets (though in startup land, that phrase usually refers to fundraising).

The purpose is to agree the commercial essentials early. This avoids spending money on solicitors to draft a 40-page agreement only to discover you disagree on something fundamental like payment terms or liability caps.

Why startups should use them

For a founder or ops lead juggling multiple priorities, heads of terms bring clarity and speed. They help you:

• Align both parties on price, scope, and timetable before legal costs start mounting.
• Surface deal-breakers early, so you can walk away or renegotiate without sunk cost.
• Give your solicitor a clear brief, which reduces drafting time and fees.
• Create a shared reference point if memories fade or someone leaves the project.

They are particularly useful for supplier agreements, partnership deals, software development contracts, and distribution arrangements.

Are they legally binding?

Usually, no. Most heads of terms state explicitly that they are not intended to create a legally binding contract, except for specific clauses such as confidentiality, exclusivity, and governing law. These carve-outs protect sensitive information you share during negotiations and prevent the other side from shopping the deal around.

But here is the catch: if you start performing the deal based on heads of terms alone, a court might find that a binding contract exists through conduct. To avoid this, mark the document clearly as "subject to contract" and do not begin work or transfer money until the full agreement is signed. If you need legal certainty on this point, speak to a solicitor.

What to include

Keep heads of terms tight. Aim for two to four pages. The goal is not to draft the final contract in miniature, but to capture the commercial skeleton.

Typical sections include:

• Parties and purpose. Who is involved and what the deal is about. Be specific about entities, not just brand names.
• Key obligations. What each side will deliver, in plain language. For a software deal, this might mean "build a mobile app with features listed in appendix A."
• Pricing and payment. Total cost, payment schedule, invoicing process, and any deposit or milestone payments. Say whether prices include VAT.
• Timeline. Start date, key milestones, and expected completion or go-live date.
• Term and termination. How long the agreement lasts and how either party can exit. Include notice periods and grounds for immediate termination, such as material breach or insolvency.
• Intellectual property. Who owns what at the end. This is critical for startups. If someone builds something for you, do you own it outright or just get a licence? Be explicit.
• Confidentiality. A short clause confirming both sides will keep commercially sensitive information confidential. This one is often made legally binding.
• Liability. A high-level statement on whether liability caps apply and at what level, such as "liability capped at fees paid" or "exclude indirect losses." This can be the most negotiated section.
• Governing law. Usually England and Wales for UK startups. Pick one and stick to it.
• Non-binding statement. A clear sentence saying the document is not legally binding except for specific numbered clauses.

What to leave out

Do not try to draft every warranty, indemnity, and boilerplate clause here. That defeats the purpose. Leave the detailed legal wording for the full contract. Focus heads of terms on what the business needs to agree to proceed.

A practical process for founders without in-house counsel

• Start with a simple template. You can build one in StartupDocs or adapt a plain-language structure. Have a solicitor review your template once, then reuse it.
• Draft the first version yourself. This keeps costs down and ensures you think through the deal clearly. Use short bullet points, not legalese.
• Share it early. Send the draft to the other party before anyone instructs lawyers. Iterate until the commercial terms feel settled.
• Mark it clearly. Add "subject to contract" at the top and include the non-binding clause.
• Send the agreed terms to your solicitor. They now have a clear mandate to draft the full agreement efficiently.

Common pitfalls

• Vagueness on scope. "Marketing services" means little. Define deliverables, formats, and deadlines.
• Silence on IP. Startups often assume they will own work product. The default legal position may say otherwise. Spell it out.
• Ignoring exit. If the relationship sours, you want a clean break. State termination rights clearly, even in heads of terms.
• Accidental binding effect. If you act on heads of terms before signing the main contract, you risk creating an unwritten binding agreement on unclear terms. Wait.

When to get a solicitor involved

Use a solicitor when the deal value is material, the liability exposure is high, or you are uncertain about the legal effect of a clause. You can also ask a solicitor to review your heads of terms before you send them to the other party, which is often a cost-effective half-step compared to full contract drafting.

Heads of terms do not replace proper legal documents, but they do make the process cheaper, faster, and less likely to collapse over a misunderstanding. For a founder-run startup, that is worth the small upfront effort.