Using Non-Binding Term Sheets in Business Deals (Part 2)
In PART 1 of this mini-series, we went over what we mean when we talk about non-legally binding term sheets, letters of intent, and memoranda of understanding (let’s just call them all “Term Sheets”), when a business should consider using, and why they can be so potentially useful in working out big and/or complicated deals.
In this PART 2, we will talk about what items you should consider including in a Term Sheet, what can be left out, and what role your lawyer in the Term Sheet process given that these are not supposed to be legally binding documents for the most part.
1. What Items Should Be Included In A Term Sheet?
What goes into a Term Sheet is always a judgment call. That said, as a general rule of thumb, a Term Sheet should include:
(a) The really ‘big’ business terms even if those are not surprising or complicated.
For example:
- An overall price tag or pricing scheme summary
- Duration of the proposed agreement/arrangement
- Who are the actual legal entities/individuals that are going to sign the finalized legal documents
- Summary description of what is being provided from whichever side -- or sides -- is going to provide any products, services, technologies, etc.
(b) Any especially complicated and/or novel components to the business arrangement.
For example:
- Any critical-but-unusual support obligations you need a new vendor to be able to provide
- If one side is giving the other side any equity as part of the deal, it is a good idea to include a description of the equity vesting conditions
(c) Any other item that is important for your business to have in the finalized legal documentation but which is either not ‘industry standard’ or the other side would, reasonably speaking, be surprised and unhappy you didn’t discuss upfront.
For example:
- Your business may always need to have some kind of termination right included that is not industry standard
- Your lawyer may flag a particular kind of legal risk involved in the deal that requires you to get extra (potentially costly) protection from the other side
2. What Is OK to Leave Out?
You don’t want your Term Sheet to be an entire novel. Otherwise, negotiating the Term Sheet will take just as much time and effort as negotiating the full legal documentation and slow down critical deal momentum.
With that in mind, we would say that, other than the really ‘biggest' picture’ deal terms, it is usually fine to leave out various business and legal points to the extent these are industry-standard legal or business terms or, even if not, are not the sort of thing that’s going to cause a major unhappy surprise for the other side when you bring them up later when drafting the actual, binding legal documents.
For example: if you are a technology provider, and your agreements normally include an industry-standard set of tech support obligations, you should likely be fine to leave out those tech support obligations or just include a very short summary (e.g. “tech support to be provided as per the terms in our standard enterprise-customer SaaS agreement”).
3. If the Term Sheet is Not Legally-Binding, What Role Does Your Lawyer Have?
Even though your Term Sheet will not be legally binding, and even though the idea is for the business teams - not the lawyers - to do the heavy lifting at this stage, you should definitely get your lawyer involved in the Term Sheet from the start.
The idea here is that the Term Sheet is a tool you can use to make sure the final legal documentation is done correctly, efficiently, and as cost-effectively as possible. To ensure that’s the case, you’ll need to talk to your lawyer about the deal and what you want to make sure is included in the Term Sheet. Your lawyer should then be able to tell you if there are critical legal issues that the proposed deal brings up (i.e. ‘deal-breakers’). These are the kind of legal issues you’ll want to consider including as Term Sheet points.
Likewise, each time the Term Sheet gets significantly revised by one side or the other, share the new version with your lawyer. This way, as the deal discussions evolve, your lawyer will be able to tell you if there are now major legal issues to consider that may not have been there before.
Conclusion
As we said in PART 1, Term Sheets can be incredibly useful in helping to keep deals on track by clarifying what both sides have agreed to in principle. However, it is important to remember there is no ‘one-size-fits-all’ Term Sheet you can assume is optimal to use for every deal you to. And even if you feel comfortable using the same Term Sheet template for this or that kind of business situation, it is always worth considering what, if anything, is important enough to the deal you are currently negotiating that what to be clear about the issue upfront.
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If you’re interested in our other articles for businesses like yours, please see “Browse, Click or Scroll: What Consent Mechanism Does Your Website Need?”, “What are Trademarks and Why Get Them Registered?”, or some of the other very helpful articles available at MGLS Insights.
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