A term sheet is a document that includes salient terms and conditions of a business deal. A term sheet is a frame or template on which a subsequent binding contract or agreement is premised on.
Term sheets are extremely helpful and beneficial for parties especially in complex or highly technical contracts. Term sheets are usually issued by angel investors, Venture Capitalists, Financial Institutions or in M&A deals, complex land sale/swap deals or property development contracts. Although on the face of it, a term sheet is not legally binding (unless parties expressly agree for it to be so), it does set out the intention of parties and the direction of negotiations which is a pivotal part of contract negotiation. In the event of subsequent litigation and in terms of narrative, it will be easier for a court of law to determine the direction of the contracting parties.
Here are five important reasons why term sheets are essential before you embark on drafting a contract:
1. Term sheets help all parties involved in the negotiation to gain a clear understanding of the proposed terms and conditions. This ensures that everyone is on the same page and minimizes misunderstandings and disputes during the contract drafting process.
2. They expedite the contract negotiation process by allowing parties to focus on key issues upfront. This can save time and resources by avoiding the need to draft and revise the entire contract multiple times.
3. Term sheets provide a degree of flexibility. Parties can explore and agree on various terms and conditions without committing to the full contract. This flexibility can be especially important when the negotiations are complex or involve multiple parties.
4. They allow parties to identify and address potential risks early in the negotiation process. This can include provisions related to dispute resolution, indemnification, and termination clauses, helping to minimize the chances of disputes later on.
5. Term sheets serve as a roadmap for the subsequent contract drafting. By outlining the key terms, parties can engage legal counsel and other experts to ensure that the contract is legally sound and compliant with relevant laws and regulations.
6. Term sheets are pivotal in maintaining balance between contracting parties and their intentions. A term sheet that is bias towards one contracting party could give rise to legal risks and consequences.
Always remember to have well drafted confidentiality and non-disclosure clauses in your term sheet to ensure that sensitive business and financial information are protected, to preserve negotiating leverage and to facilitate due diligence.