Term Sheets In Turkish Venture Capital Transactions: Legal Enforceability And Two Common Pitfalls

A term sheet is the first substantive document exchanged in a venture capital transaction. It records the commercial and legal parameters that the parties have agreed in principle (e.g., valuation, investment amount, governance rights, exit mechanics) and signals that serious negotiations have begun. In the United States, where the global VC standard was established, the term sheet is a largely standardized instrument governed by well-developed transactional practice and a deep body of Delaware case law.

In Türkiye, the picture is more complex. The country’s legal system belongs to the Continental European tradition, built on mandatory statutory rules and doctrinal categories that do not map neatly onto Anglo-American contractual conventions. A term sheet labelled “non-binding” may nonetheless carry legal consequences; provisions that are routine in a NVCA-standard term sheet may be unenforceable if transplanted into a Turkish joint-stock company without adaptation; and financial protections that Delaware investors take for granted (e.g., anti-dilution, liquidation preference, board appointment rights) require careful structural rethinking under Turkish corporate law.

This article examines the most consequential legal questions that arise when a term sheet is used in a Turkish VC transaction and sets out the practical implications for founders and investors alike.

1. The Legal Nature of a Term Sheet Under Turkish Law

The threshold question for any Turkish VC transaction is straightforward: what exactly is a term sheet?

The statutory framework. The Turkish Code of Obligations (“TCO”) requires offer and acceptance for a binding contract to arise (TCO Art. 1). Where parties wish to commit themselves to entering into a future contract, they may do so through a preliminary agreement (TCO Art. 29 — “ön sözleşme” or pactum de contrahendo). A preliminary agreement is binding only if the essential terms of the main contract are objectively determinable, and it gives either party the right to compel the other to execute the main agreement through court action. A mere “invitation to treat” (“icaba davet”), by contrast, involves no binding commitment whatsoever.

The dominant academic view. Turkish scholarship, following the approach of leading civil law scholars, holds that a typical VC term sheet cannot be characterized as a preliminary agreement under TCO Art. 29. The reason is straightforward: standard term sheets are expressly conditioned on due diligence completion, investment committee approval, negotiation of a satisfactory shareholders’ agreement, and other subjective preconditions. A document laden with such conditions lacks the definitive commitment to contract that a preliminary agreement requires. The prevailing view treats term sheets as sui generis instruments (an Anglo-American import that sits outside the traditional TCO taxonomy) that record the current state of negotiations without creating an obligation to close. The scholars further note that term sheets (ticari şartlar belgesi) differ from letters of intent primarily in their brevity, and that precisely because they rest on a less developed factual basis, the scope of pre-contractual good faith obligations is correspondingly wider.

The consequence of a “non-binding” label. Turkish courts interpret contracts according to the genuine common intention of the parties (TCO Art. 19). A clear statement that the term sheet is not legally binding, and that neither party is obliged to enter into the investment, carries substantial weight. Courts and doctrine consistently treat such language as excluding both preliminary agreement status and general contractual liability. The practical corollary is that Turkish term sheets offer parties considerably more freedom to walk away than their Delaware counterparts, but only if the non-binding clause is drafted with precision.

A critical distinction: the “non-binding” characterization applies to the commercial terms of the proposed investment (valuation, structure, governance). Certain other provisions, discussed below, must be expressly carved out as binding regardless.

2. Pre-Contractual Liability: When Walking Away Has a Price

The non-binding nature of a term sheet does not immunize the parties from all legal consequences during the negotiation period. Turkish law recognizes a distinct category of liability that arises independently of contract formation.

Culpa in contrahendo. The good faith obligation imposed by Turkish Civil Code Art. 2 operates independently of any contractual relationship and attaches as soon as the parties enter into substantive negotiations. This duty encompasses obligations to disclose material information, not to create a false impression that the transaction will close, and not to break off negotiations arbitrarily after having induced the other party to rely on the expectation that a deal would be reached. Breach of these obligations gives rise to what the doctrine calls culpa in contrahendo liability, which is characterized as arising from the relationship of trust created by the negotiation process rather than from contract.

The scope of recoverable damages. Culpa in contrahendo liability is deliberately limited in scope. The injured party may claim its “negative damages” (menfi zarar / reliance damages): the costs actually incurred in the expectation that a deal would close e.g., legal fees, financial advisory costs, due diligence expenses, and foregone alternative opportunities that can be concretely demonstrated. What the injured party may not claim, as a general rule, is its “positive interest” (müspet zarar / expectation damages): the profit it would have made had the transaction completed. This distinction is critical in a VC context, where the lost upside of a promising investment may be the most significant loss, yet is almost impossible to prove to the standard Turkish procedural rules require.

The Court of Cassation’s approach. Turkish appellate courts have confirmed that arbitrary withdrawal from negotiations after inducing reasonable reliance can give rise to a claim for negative damages. The courts assess the intensity of negotiations, the conduct of the withdrawing party, and whether a legitimate reason (such as a material adverse finding in due diligence) existed to justify termination. Absence of any such reason, combined with evidence that the withdrawing party had signaled an intention to proceed, is the typical trigger for liability.

Practical implication. The most effective response to culpa in contrahendo risk is contractual. The term sheet should include an expressly binding “Expenses and Cost Allocation” clause that states clearly who bears what costs in the event negotiations are terminated and under what circumstances. A break-up fee payable by a founder who terminates without a legitimate cause (framed as a contractual penalty (cezai şart) under TCO Art. 179) is the most reliable mechanism. It converts liability from the uncertain terrain of good faith to the enforceable terrain of contract.

3. Confidentiality and Exclusivity: The Binding Core of a Non-Binding Document

A well-drafted term sheet is not simply labelled “non-binding” as a whole. It is structurally divided into two categories: provisions that are non-binding (the commercial terms), and provisions that are immediately and expressly binding (the process terms). The two most important process provisions are confidentiality and exclusivity.

Legal basis for selective binding force. TCO Art. 26 enshrines freedom of contract: parties may determine the content of their agreement as they see fit, provided they do not violate mandatory rules, morality, or public order. There is no rule preventing a single document from containing both binding and non-binding provisions.

Confidentiality. A binding confidentiality clause in a term sheet functions as a standalone NDA for the due diligence period. Its breach is a breach of contract governed by TCO Art. 112, not merely a violation of pre-contractual good faith. The injured party is entitled to damages, and a cezai şart (contractual penalty) clause converts the claim from one requiring proof of loss to one requiring only proof of breach. In transactions involving source code, customer data, financial projections, or other commercially sensitive material, this is not a formality: it is the primary line of protection.

No-shop / exclusivity. The exclusivity clause prohibits the target company and its founders from soliciting, entering into discussions with, or providing information to any third-party investor during the due diligence period (typically 30–90 days). It is a negative obligation (yapmama borcu) under Turkish law. Breach entitles the investor to damages under TCO Art. 112. Specific performance, a court order compelling the founder to cease negotiations with a rival investor is theoretically available under Turkish procedural law, but obtaining an interim injunction to this effect is extremely difficult in practice: Turkish courts apply strict urgency and irreparable harm requirements to interim injunctions in commercial matters, and the speculative nature of investment loss makes both thresholds hard to satisfy.

The indispensability of the penalty clause. Because proof of actual loss in a confidentiality or exclusivity breach is extraordinarily difficult: how does one quantify the damage caused by a founder showing a rival VC the cap table? Therefore, the contractual penalty clause is not optional. It is the enforcement mechanism. The amount must be and linked specifically to the breach of each binding provision. A global “non-binding” label without a clear carve-out for these provisions, or a confidentiality clause without a penalty clause, leaves the investor with a theoretical remedy and a practical impasse.

4. Common Pitfalls

Across Turkish VC practice, the same structural errors recur. The following is a practitioner’s checklist of the most consequential.

Misreading the scope of “non-binding”

The non-binding label suppresses contractual liability, not culpa in contrahendo liability. A party that has conducted extensive due diligence, signaled a clear intention to invest, and then walked away without a demonstrable legitimate reason (e.g., a material adverse finding, a regulatory obstacle, a failure of conditions) remains exposed to a claim for the other party’s reliance costs. The solution is a clear, bilateral cost allocation clause, and for investors who want maximum flexibility an explicit clause stating that either party may terminate for any reason or no reason, with the sole consequence being that each party bears its own costs.

No-shop clause without a penalty clause

An exclusivity obligation without a contractual penalty clause is a declaration of intent, not an enforceable commitment. Proving actual damages from a breach, meaning the loss of the specific investment opportunity, valued at a speculative future return is a near-impossibility under Turkish evidentiary standards. The penalty clause is the enforcement mechanism, not an enhancement. Its amount should be meaningful relative to the transaction size, specified in advance, and subject to a clear trigger (e.g., the founder providing information to, or entering a term sheet with, any third-party investor during the exclusivity period).

5. Conclusion

Term sheets are deceptively simple documents. Their brevity encourages the assumption that the hard legal work begins later, with the shareholders’ agreement and the articles of association. In a Turkish VC transaction, that assumption is wrong. The term sheet is where binding obligations are first created, where culpa in contrahendo exposure begins to accrue, and where structural choices about enforceability, exclusivity, and cost allocation set the parameters for everything that follows. Founders and investors who approach the term sheet as a formality, rather than as a substantive legal instrument, do so at their own risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.