What is a term sheet?
A term sheet is in the same family as memoranda of understanding(MOUs) and heads of agreement. MOUs and heads of agreement are documents that parties sign before they sign a formal agreement, i.e. they document what the parties would like to see in the final agreement. Because they are usually only agreements to agree a final document later term sheets are usually non-binding, just like MOUs and heads of agreement. Just to be clear, a non-binding agreement is one where a party to that agreement cannot sue if the agreement is not honoured by the other party (because it is ‘not legally binding’).
Are term sheets always non-binding?
However sometimes Term Sheets are binding subject only to the preparation of a formal legal agreement. To make things more complicated sometimes Term Sheets can be non-binding regarding certain clauses, but be legally binding for other clauses (e.g. the confidentiality and exclusivity clauses could be binding but none of the other clauses are). So in this example if one party breached the confidentiality provision by disclosing confidential information then because the confidentiality clause is ‘binding’ the other party could sue them for breach of contract (i.e. they could be sued for breaching the terms of the Term Sheet).
Heading spinning? Fair enough… it took us a while to get our head around them too.
When are term sheets used?
Term sheets are generally used as a pre-contractual agreement for investment in a business or in the preparation of sale of a commercial asset or business. Binding term sheets should contain as much information as the formal agreement in relation to the commercial arrangements of the deal or transaction. All terms, conditions and clauses should be included.
Non-binding term sheets summarise the provisions that will be in the agreement and might include a date that the agreement will be concluded. Terms sheets can also be written as proposals, containing the provisions that one of the parties would like in the agreement. They set the scene for future negotiations and if there is a provision that you particularly want in the final agreement, you can seek a signed promise that it will be included.
Who are term sheets good for?
Term sheets can be good for start-up business owners and business sellers. Negotiating with large investors or buyers is tricky because important clauses can be hidden behind complicated legal language. Having a term sheet gives you a simplified version and general overview of what the final contract will look like. It gives you a chance to review the offer and terms and then do some due diligence (investigation) to figure out whether you want to proceed to a final contract.
A binding term sheet is the type of document that you’d ideally want to sign after you get the initial go-ahead from an investor or buyer. Right after the handshake and before you pop the bubbly.