
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comCounsel
212-286-0747 dbrecher@sh-law.comWhether seeking to obtain financing, negotiating the purchase of real property, or entering into a partnership, most small business owners will encounter term sheets at some point. In its most basic form, a term sheet is a non-binding document that sets forth the material terms and conditions of a business agreement. It then serves as a blueprint for drafting the final contract.
When negotiating a complex business deal, a term sheet ensures that everyone is literally on the same page because key terms are outlined in bullet points. It also ensures that the parties have reached an understanding of at least the key elements involved in the deal before they spend additional time and resources to reach a formal legal agreement.
“…term sheets are often an essential part of securing financing…”
While the parties are generally not bound to the elements of the agreement laid out in the term sheet, there are often two aspects of the document that are specifically stated to be legally binding. For instance, term sheets may contain non-disclosure provisions that require the parties to keep the negotiations confidential. Term sheets may also contain exclusivity provisions that prevent the one or both parties from negotiating with other potential business partners for a specified period of time. The provisions are intended to prevent businesses from using the term sheet to negotiate a better deal with someone else.
For new and growing businesses, term sheets are often an essential part of securing financing. Even though they are intended to be stripped down versions of the final agreement, term sheets can still be overwhelming for first-time entrepreneurs.
While the entire document should be carefully negotiated, below are some key provisions to watch out for when meeting with venture capital (VC) firms and other potential investors:
While term sheets can be headache-inducing for small business owners, experienced lawyers are well-versed in how to negotiate and document complex business transactions. Therefore, it is advisable to consult with experienced counsel early in the process rather than simply relying on your attorney to draft the final contract.
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