A Term Sheet is the start and heart of a successful deal.
Our Boulder contract lawyers understand that a term sheet is critical to a successful deal. Whether its a binding or non-binding term sheet, you have to get it right so that all parties to the transaction understand the framework of the deal. We will assist you with the conception, review, negotiation, drafting, and enforcement of a term sheet and the ultimate deal documents necessary for closing the transaction.
What is a Term Sheet?
A term sheet is a binding or non-binding agreement that sets forth the material terms and framework for a transaction. Term sheets serve as the template for the more detailed transaction documents. Most people believe they can draft their own term sheet without any issues – sometimes they are right. However, when they’re wrong, its often they’re very wrong, and in these cases we usually see key issues and expectations are not addressed which leads to confusion, sometimes kills or greatly sours the deal or worse, leads to litigation.
What is in a Term Sheet?
A good term sheet will contain – at the very least – the material terms of the deal. That is, the term sheet should detail the Who, What, Where, and When. Who are the parties to the deal? What is what is being bought or sold, and for how much? Is it an asset purchase or a stock sale? Where is the transaction going to take place, and when? When is the closing? What law will apply to the deal? When and where will the money be exchanged? Exclusivity? Confidentiality? All of these items need to be considered and included as necessary. Of course, there is often much more included as called for by the specifics of the deal.
Binding Term Sheet vs. Non-Binding Term Sheet
A binding term sheet is one that creates legally binding obligations on the parties. A non-binding term sheet is one that does not create legally binding obligations on the parties. So, what it’s the point of a non-binding term sheet? Frankly, there really isn’t one. What we see the most of is a hybrid term sheet where some of the terms in the terms sheet are binding such as exclusivity, confidentiality, choice of law. Basically, the terms relating to how the parties are going to negotiate and build out the deal. But the terms relating to the deal itself remain non-binding. Doing a deal takes considerable time and money so having some terms binding puts skin in the game on both sides, and incentivizes good faith and prompt negotiation.
Term Sheet vs. Letter of Intent (“LOI”)
The terms “term sheets” and “letters of intent” are often confused and used interchangeably. However, we see them as different. We consider a letter of intent to set forth the intention of the parties to enter into a deal, or to be a written offer to make a deal – and an offer that remains open until withdrawn or accepted. So be careful! You could say the letter of intent in a step closer to an executed agreement to make a deal. Of course, you can have a non-binding letter of intent, but letters of intent are often viewed as contracts and litigated when deals go bad. And, courts will sometimes will construe the LOI as a contract and award damages for breach thereof. So, you need to be careful. We advise using term sheets for the reasons set forth above.
LaszloLaw is a Boulder law firm. The Boulder contracts lawyers of LaszloLaw provide counsel on a wide range of legal needs including term sheets, contracts, business formation, mergers and acquisitions, transactions, buy sell agreements and other important business contracts. Contact our Boulder lawyers online or at 303-926-0410 to discuss your legal needs.
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