Partnership agreement, LOI and term sheet: which document to use when

The difference between a letter of intent, a term sheet and a partnership agreement — and how to use each at the right stage of a deal.

Partnership agreement, LOI and term sheet: which to use when

When starting a new business relationship — whether that is a joint venture, a strategic partnership or an investment deal — you will likely work through three different documents before anything is finalised. Each has a different purpose and binding force.

Legal context

Partnership and investment documents are largely governed by contract law in each jurisdiction. In Slovakia, limited liability company (s.r.o.) governance is regulated by §§ 105–153 of the Commercial Code. Shareholders’ agreements are not explicitly defined by Slovak law but are fully valid as commercial contracts — and are increasingly standard in VC-backed companies.

For founders and SaaS companies, the key distinction is:

• Articles of association (spoločenská zmluva): mandatory founding document, filed with the commercial register.
• Shareholders’ agreement (SHA): supplementary binding document between shareholders, governs rights beyond what articles cover.
• LOI / term sheet: pre-contractual documents capturing intent before binding negotiations.

Letter of intent (LOI)

A letter of intent captures the basic parameters of a potential deal before detailed negotiations begin. It is typically non-binding (or partially binding), and its main purpose is to:

• Confirm that both parties are serious and aligned on the broad terms.
• Establish confidentiality obligations during negotiations.
• Set an exclusivity window — a commitment not to negotiate the same deal with anyone else.

LOIs are most useful in acquisitions, investor entry or strategic partnerships, where you want to agree the outline before spending money on due diligence and legal fees.

A well-drafted LOI explicitly states which clauses are binding (typically confidentiality and exclusivity) and which are not (the economic terms).

Term sheet

A term sheet is more detailed than an LOI — it summarises the key economic and governance terms that will appear in the final binding agreement. It is common in venture capital and private equity transactions.

Typical term sheet contents:

• Investment amount and company valuation (pre/post-money).
• Share class (ordinary vs. preferred).
• Liquidation preference and anti-dilution provisions.
• Founder vesting schedule.
• Board composition.
• Exit and drag-along rights.

A term sheet is still non-binding on economic terms, but it is a serious document — renegotiating after a term sheet is signed reflects poorly and can kill a deal.

Founder vesting — why it is essential

Vesting is the mechanism by which founders progressively “earn” their equity over a defined period. Without it, a co-founder can leave after six months and walk away with 25–50 % of the company having contributed minimal long-term value.

Standard vesting schedule:

• 4-year period with a 1-year cliff.
• After 12 months the founder receives 25 % of their allocation (cliff).
• The remaining 75 % vests monthly over the following 36 months.

Good leaver / bad leaver provisions:

• Good leaver (e.g., resignation for health reasons): retains vested equity.
• Bad leaver (e.g., termination for cause): company may repurchase unvested and sometimes vested shares at nominal value.

Institutional investors check for vesting provisions during due diligence — a startup without vesting is a red flag.

Partnership agreement

A partnership agreement (or shareholders’ agreement in a company context) is the fully binding, comprehensive document that governs the long-term relationship between co-founders, joint venture partners or shareholders.

Key provisions:

• Ownership stakes and capital contributions.
• Decision-making and voting rights.
• Profit distribution and reinvestment policy.
• Share transfer restrictions (lock-ups, right of first refusal, drag-along and tag-along).
• Exit clauses — buyout mechanisms, valuation methodology.
• Deadlock resolution.

The typical sequence

1. Sign the LOI — signal intent, protect confidentiality, lock exclusivity.
2. Agree the term sheet — nail the numbers before the lawyers write the full doc.
3. Execute the partnership agreement — the legally binding document both sides will live by.

Skipping step 1 or 2 is tempting when you trust the other party — but it regularly leads to expensive misunderstandings once lawyers get involved.

zipzipdoc can generate a letter of intent, a term sheet and a full partnership agreement from your brief, ready for electronic signing.

Start free — 14 days, no card.

Common mistakes in partnership agreements — and how to avoid them

Mistake 1: Treating the articles of association as the whole agreement

The articles of association (spoločenská zmluva) filed with the commercial register are a public document with limited flexibility. They govern basic company mechanics — share capital, address, statutory representatives. They are not the place for sensitive commercial arrangements: profit sharing, founder buyout mechanisms, non-compete obligations, vesting schedules.

All of those belong in the shareholders’ agreement — a private document between the partners. The two must be consistent; the SHA cannot override Slovak Commercial Code minimums, but within that space, it can cover everything the articles cannot.

Mistake 2: No deadlock mechanism

Many partnership agreements are silent on what happens if equal partners cannot agree on a significant decision. The result: the company becomes legally paralysed. Courts cannot substitute the shareholders’ judgment on commercial decisions — they can only dissolve the company.

A well-drafted deadlock clause gives partners a structured exit before reaching court. Common mechanisms:

• Russian roulette / shotgun clause: one party names a price; the other either buys at that price or sells at that price. Creates an incentive for the initiating party to name a fair price.
• Independent valuation: an agreed auditor or investment bank values the company; the parties split based on the valuation.
• Escalation to board / advisors: before any formal mechanism triggers, a defined escalation path to independent advisors or a non-executive board member.

Mistake 3: No IP assignment

In a tech company, the most valuable asset is intellectual property. If the co-founder who built the product has not formally assigned that IP to the company, the company may not actually own it — the individual founder does.

Every partnership agreement for a product company should include a confirmation that all IP created in the scope of the founders’ work is assigned to the company, and that founders grant the company a licence to any background IP they bring in that is not assigned.

Mistake 4: Verbal understandings about roles and salaries

“We agreed that I run product and you run sales, and we each take €5,000 a month” is not an agreement — it is a conversation. When one partner is dissatisfied and wants to revisit the arrangement, the other has no document to point to.

Everything agreed verbally should be in the SHA: role definitions, salary or draw arrangements, working time expectations, and what happens if one partner is not delivering.

When to involve a lawyer

Partnership agreements, shareholders’ agreements and investment documents are among the documents where professional legal review adds the most value. The cost of a lawyer reviewing a draft is typically far lower than the cost of litigating a poorly drafted agreement years later.

zipzipdoc’s role is to produce a comprehensive, well-structured first draft in minutes — so that a lawyer reviews a substantially complete document rather than drafting from a blank page. This cuts legal fees by 60–80 % while ensuring the final document is reviewed by a professional.

For straightforward two-founder companies early in their journey, a zipzipdoc-generated SHA reviewed by a startup-experienced lawyer for 2–3 hours is sufficient. For companies raising institutional capital, a full legal team review of the investment and shareholders’ documents is essential before signing.

Frequently asked questions

Is an LOI legally binding?

An LOI can be partially binding — confidentiality and exclusivity clauses are typically binding, while commercial terms are not. The binding scope must be explicitly stated in the document. If nothing is stated, a court will assess binding force based on the overall context and language used.

What happens if co-founders cannot agree on a key decision?

Deadlock is one of the biggest risks for multi-founder companies. The shareholders’ agreement should include a deadlock resolution mechanism — for example, a buyout clause (one buys the other out), mediation, or arbitration. Without this, the company can become paralysed.

Is a term sheet binding?

Typically no — a term sheet is a non-binding document intended to capture agreed terms before the binding contract is prepared. Exceptions include exclusivity and confidentiality provisions, which are often binding even in a non-binding term sheet.

Can a shareholders’ agreement override the articles of association?

No. A shareholders’ agreement cannot conflict with the Commercial Code or with the articles of association filed with the commercial register. It can, however, govern relations between shareholders beyond what the law prescribes — for example, right of first offer on share transfers, or drag-along and tag-along rights.

How quickly can I have a signed LOI with a new partner?

With zipzipdoc you can generate an LOI from a brief description in under 5 minutes. Both parties sign electronically — the entire process including signing typically takes under an hour from the first inquiry.