February 4, 2026

What To Expect When You’re Negotiating a Term Sheet

Subscribe to Our Newsletter

Newsletter


William C. Marra

|

February 4, 2026

When a claimant and a litigation funder agree that a case merits further consideration, the next step in the funding process is typically the issuance of a term sheet.


Term sheets are familiar instruments in finance, M&A, and investment transactions. In litigation finance, they serve a similar function: outlining the key economic and structural terms of a proposed funding arrangement before the parties incur the time and expense of full diligence and documentation.


Most litigation finance term sheets are short—often just a few pages—and non-binding. They are designed to confirm alignment on the principal terms of a transaction, not to finalize it.



What a Term Sheet Is — and Is Not


A term sheet is not a funding agreement. It does not obligate either party to proceed with a transaction. Instead, it provides a framework for diligence and negotiation by identifying the essential elements of a proposed deal.


At a minimum, a litigation finance term sheet typically addresses:


  • The parties to the proposed transaction
  • The specific claims or cases to be funded
  • The amount of capital to be committed
  • How that capital will be used
  • How proceeds will be distributed if the case resolves successfully


While many provisions are later refined, the term sheet sets expectations that shape the remainder of the process.



Scope of Funding


One of the first items addressed is the scope of the funded matter.


The term sheet will identify which claims or cases are included—particularly important where a claimant or law firm submits a portfolio for consideration. Not every case under review necessarily meets a funder’s underwriting criteria, and the term sheet should make clear which matters are included and which are not.



Amount and Use of Capital


The term sheet will specify the total amount of capital the funder proposes to commit and how that capital is allocated.


In most funded matters, capital is earmarked for:

  • Legal fees, often funded in part, with the law firm responsible for the balance (e.g., 50% of its fees) and subject to a cap. The law firm is typically responsible for all fees incurred above the cap.


  • Case expenses, such as experts, discovery vendors, and court costs, often funded at a higher percentage but also subject to a cap. The claimant is usually responsible for all case expenses incurred above the cap.


  • Claim monetization / working capital, in appropriate cases. This is non-recourse financing that may be used by the claimant for general corporate purposes, secured by the funded matter.


The term sheet allocates both the amount of fees and costs, and responsibility for costs incurred above agreed caps. These provisions underscore the importance of a realistic litigation budget, as overruns are typically borne by the law firm or claimant rather than the funder.



Returns and Waterfalls


A central feature of any term sheet is the return structure—how proceeds will be distributed if the case resolves successfully.


Most term sheets include a waterfall, a priority-based distribution mechanism commonly used in finance. While structures vary, waterfalls typically provide that:


  • Funders recover their deployed capital before profits are distributed


  • Law firms may recover deferred fees or earn contingent compensation


  • Claimants receive the balance of proceeds, often representing the largest share of the recovery


The precise sequencing and economics depend on the risk profile of the case, the amount of capital deployed, and the parties’ respective contributions. Importantly, waterfalls matter most in downside or mid-range outcomes. In strong recoveries, the parties often reach their target economics well before the waterfall’s final tiers come into play.



Additional Common Provisions


Term sheets may also address:


  • Transaction or underwriting fees payable upon closing


  • Exclusivity periods during diligence


  • Rights of first refusal relating to future matters


  • Circumstances under which either party may withdraw, and whether withdrawal results in a break fee payable by the claimant.


These provisions are typically refined during diligence and documentation but are useful to surface early.



From Term Sheet to Funding Agreement


After a term sheet is executed, funders usually enter an exclusivity period—often 30 to 45 days—during which they conduct comprehensive diligence and negotiate a definitive funding agreement.


That agreement, not the term sheet, governs the parties’ rights and obligations. Understanding the term sheet, however, is essential to navigating what follows.



Closing Thought



A well-drafted term sheet does not merely summarize economics. It reflects a shared understanding of risk, incentives, and strategy at an early—but critical—stage of the litigation.


Approached thoughtfully, the term sheet process can set the foundation for a productive funding relationship aligned with the goals of both counsel and client.

Certum Group Can Help

Get in touch to start discussing options.

Recent Content

By Patrick Dempsey • October 27, 2026
This is the fifth post in Certum Group's seven-part series bringing our Trade Secret Litigation Playbook to the blog. It draws on Part V of the Playbook, Choosing Counsel and Structuring the Economics. Read or download the full Playbook here . The most common mistake I see claim holders make is also the most understandable one: they sign a law firm to a full contingency before they ever talk to a funder. A firm offering to take the whole case on contingency feels like a gift. You spend nothing, the firm carries the risk, and you share the upside only if you win. What could be wrong with that? When you look at cases side by side, quite a lot. A claim holder who engages a funder first and then hires counsel on a hybrid structure typically keeps substantially more of the recovery. To see why, start with the three ways to pay for a case. The three fee structures Hourly is the traditional model: you pay standard rates as the work is done, you own the outcome, and you bear 100% of the cost, win or lose. It fits deep-pocketed companies that want complete control, and smaller matters where alternative structures are hard to price. Full contingency puts the firm's fees entirely at risk, paid only from the recovery, usually at 33% to 40% of whatever comes in. It is attractive when you have limited capital, and the willingness of a good firm to take it is a genuine signal of merit. But it carries a real cost: that 30-to-40-percent-plus is meaningfully more than the combined economics of a hybrid or funded structure. Hybrid — shared risk — is the sweet spot for most matters between roughly $10 million and $250 million. The firm discounts its hourly rate, often steeply, in exchange for a smaller contingent premium on success. It preserves alignment while avoiding the full-contingency tax, and it becomes especially powerful when a funder pays the discounted fees, the claim holder pays nothing out of pocket, and counsel keeps meaningful upside. Why sequence changes the outcome Here is the part that sounds counterintuitive until you run the math. A 33-to-40-percent contingency leaves you with 60 to 67 cents of every recovery dollar. A hybrid structure — where counsel takes a smaller contingency, often 15 to 25 percent, layered on a discounted hourly fee that a funder pays — frequently leaves the claim holder with 50 to 65 percent after the funder's return, and sometimes more. The precise economics depend on the size and shape of the case, but the direction is robust: full contingency is rarely the cheapest path for a strong claim. Sequence matters because leverage is perishable. Once you sign a full-contingency engagement letter, the firm has effectively "bought" the case for its own investment committee, and switching firms afterward is expensive and awkward. With a funder in place and a hybrid structure available, you keep your optionality — you can hire the very best trial firm for your matter, rather than the best firm that happened to be willing to shoulder full risk. A funder's "no" is also valuable There is a quieter benefit, too. When a sophisticated institutional investor is willing to deploy non-recourse capital against your claim, that is one of the strongest external validations of case quality you can get, and counsel reads it that way. But even a decline is useful: it tells you where the weaknesses are — thin damages, a collectability problem, an identification gap — while you can still fix them, and before you have committed to a firm. Either way, you learn something you would rather know now than a year in. The sequence to consider In practice it looks like this. Retain trade secret counsel on a focused, limited-scope engagement to run an initial case assessment under privilege. While that is underway, open a confidential conversation with one or more funders, sharing the same materials. Use the funder's view — its willingness to fund, its read on damages, its suggested economics — to inform your choice of trial counsel. Then interview firms with that information in hand and propose a hybrid structure supported by the funder. Done well, the engagement letter, the funding agreement, and your preservation protocols can all be signed within the same week. None of this is a knock on contingency counsel, many of whom are excellent. It is simply a reminder that the cheapest-looking option at signing is often the most expensive one at resolution — and that a short conversation, before you sign anything, can be worth a large share of the recovery. Go deeper with the Playbook. This post covers one piece of a much larger picture. For the full framework — what the law requires, what a strong pre-filing case looks like, how damages experts value these matters, how counsel fee structures change your economics, and how litigation finance fits in — read Certum Group's Trade Secret Litigation Playbook , our field guide for business owners and the counsel who advise them: certumgroup.com/the-trade-secret-playbook . And if you are evaluating a live dispute — or simply want to pressure-test what a matter is worth and how it might be funded — get in touch. A confidential conversation with Certum is free and carries no obligation, whether or not you ultimately seek funding. Reach us at certumgroup.com/contact-us .
By Ross Weiner • October 21, 2026
A Connecticut state court has joined a long line of precedent holding that a litigant’s communications with a litigation funder are irrelevant and improper subjects of discovery. On October 19, 2026, the Connecticut Superior Court (Stamford) granted plaintiff Thomas Steffanci’s motion in limine and barred any evidence or argument about his litigation funding agreements at trial in Steffanci v. DFG Trademarks V, LLC (Docket No. FST-CV20-6045998-S). Judge Sheila Ann Ozalis found the agreements irrelevant, prejudicial, and unnecessary for the point defendants wanted to make. The dispute Steffanci moved to exclude his funding agreements as irrelevant to the claims and defenses in his upcoming trial, in which he is seeking at least $4 million in contract and fiduciary duty claims against his former employer. Defendants opposed on two grounds: Drafting intent. A central issue is whether the operative contract required amendments to be in writing. Defendants argued the funding agreements contain express written-amendment clauses, i.e., the kind Steffanci allegedly deleted from the LLC Agreement, showing he knew how to require a writing when he wanted one. Jury narrative. Defendants said the funding evidence was needed to rebut a misleading picture of a David vs. Goliath story. The court’s reasoning The court sided with plaintiff, finding that admitting the funding agreements for either purpose would be prejudicial and irrelevant to the claims and defenses. The decisive point was cumulativeness. Defendants did not need the funding agreements to show Steffanci knew how to draft a written-amendment requirement, because another contract at issue in the case (and admissible at trial) contains language “virtually identical” to the clauses defendants pointed to in the funding agreements. The order did not separately address the “corporate family” narrative argument beyond rejecting it as part of the overall relevance and prejudice finding. Why it matters The ruling adds to the line of decisions keeping litigation funding agreements away from juries absent a specific, case-tied need. The ruling also further supports the view that courts should not adopt procedural rules requiring the mandatory disclosure of litigation funding. Courts already have inherent power to require such disclosure if appropriate, and they usually find that disclosure is inappropriate. A few practical points for funders: Creative relevance theories still face a prejudice and necessity screen. Defendants offered a contract-interpretation rationale rather than a generic bias attack, and it still failed. Cumulative alternatives sink the argument. Where the same point can be made with an ordinary deal document already in evidence, courts have little reason to put the funding agreement in front of the jury. “David vs. Goliath” rebuttal arguments are not enough. The court did not accept that funding evidence is needed to balance a sympathetic plaintiff narrative. Boilerplate travels. Defendants’ theory rested on standard written-amendment clauses in the funding documents. Funded parties should expect opponents to mine funding agreements for drafting comparisons and be ready with an argument like the one that worked here. Steffanci v. DFG Trademarks V, LLC, No. FST-CV20-6045998-S (Conn. Super. Ct. Oct. 19, 2026) (Ozalis, J.) (order on Motion in Limine, Entry No. 892.00). Certum’s Model Brief Certum Group has published a model brief advising claimants and their counsel on how to resist discovery requests like those Steffanci faced in his Connecticut case. If you are interested in further reading on the discoverability of litigation finance agreements, click here to download the brief.
By Patrick Dempsey • October 13, 2026
This is the fourth post in Certum Group's seven-part series bringing our Trade Secret Litigation Playbook to the blog. It draws on Part IV of the Playbook, What Your Case Is Worth. Read or download the full Playbook here . Ask a business owner what a trade secret case is worth, and the first instinct is almost always the same: what did we lose? It is the intuitive measure, and it is usually the smallest one on the table. Trade secret law rewards claim holders who think about damages more expansively than "our lost sales," and the gap between the intuitive number and the recoverable number is often enormous. There are four measures worth understanding, and lost profits is only the first. Lost profits: what you would have earned The revenue you would have earned absent the misappropriation — contracts you would have signed, renewals you would have held, pricing power you could have sustained. Lost profits require you to prove causation between the taking and the foregone revenue, which is where most of the work goes. It is a real number, but it is anchored to your own historical performance, and that ceiling is frequently lower than what the case is actually worth. Unjust enrichment: what the defendant gained This is usually the largest measure, and by a wide margin. Unjust enrichment captures everything the defendant gained by taking the shortcut: the R&D and engineering it avoided, the head-start value of reaching the market faster than an independent developer could have, the savings and margins it captured, and — in the strongest cases — disgorgement of the revenue its product earned because it was built on your secret. In software, manufacturing, and pharmaceutical cases, the avoided-time-to-market term alone can dwarf your lost profits, because it measures the defendant's entire economic benefit rather than your specific loss. Reasonable royalty: the floor An objective measure grounded in what the defendant would have paid to license the secret in an arm's-length deal. It is typically the smallest of the three, but it functions as a floor when lost profits are speculative and unjust enrichment is contested. Sophisticated claim holders do not treat it as a fallback; they treat it as an independent anchor that constrains how small the number can reasonably be. Exemplary damages and fees: what willful conduct adds If the misappropriation was willful and malicious, the DTSA and most state statutes allow enhanced damages of up to twice the compensatory award, plus attorney's fees. 1 Willfulness is not a rhetorical flourish; it is a doubling, sometimes a tripling, of the core recovery. And the evidence that establishes it — an internal email, a board slide, a pattern of ignored warnings — is exactly the kind of material that discovery tends to surface. That is why intent belongs at the center of the case from day one. The Versata signal If you want a live illustration of how large the gap can be, look at the Federal Circuit's 2026 decision in Versata Software v. Ford. The trial court had tried to cap Versata's trade secret damages at a licensing-based model — essentially, what Ford would have paid — and zeroed out the rest as an undeserved "windfall." The Federal Circuit disagreed, holding that the DTSA's text expressly allows recovery of the unjust enrichment the defendant captured, even when that figure is far larger than any license fee. The message to corporate defendants is blunt: if you misappropriate rather than license, you assume the risk that the damages will dwarf what you could have paid. The message to claim holders is just as clear — the ceiling on your case is often much higher than your accountant's first estimate. Why this matters before you file Claim holders who engage a damages expert early consistently do better — not because the expert changes the facts, but because an early damages view changes three downstream decisions. It changes which counsel you hire, because the firms built for a $50 million case are different from the firms built for a $5 million case. It changes your fee structure, because a firm weighing a contingency needs a damages view to price it. And it changes settlement posture, because a plaintiff who can articulate a well-supported range anchors the negotiation, while one who cannot is negotiating against the defendant's number. The defendant almost always knows what you might get at trial. The only question is whether you do. Go deeper with the Playbook. This post covers one piece of a much larger picture. For the full framework — what the law requires, what a strong pre-filing case looks like, how damages experts value these matters, how counsel fee structures change your economics, and how litigation finance fits in — read Certum Group's Trade Secret Litigation Playbook , our field guide for business owners and the counsel who advise them: certumgroup.com/the-trade-secret-playbook . And if you are evaluating a live dispute — or simply want to pressure-test what a matter is worth and how it might be funded — get in touch. A confidential conversation with Certum is free and carries no obligation, whether or not you ultimately seek funding. Reach us at certumgroup.com/contact-us . Sources 1. 18 U.S.C. Section 1836(b)(3)(B) (permitting recovery of unjust enrichment not addressed in computing actual loss); Section 1836(b)(3)(C)-(D) (exemplary damages up to twice the compensatory award, and attorney's fees, for willful and malicious misappropriation).