Term Sheets – Succession-Inspired Success
- Dan Davies
- May 7
- 4 min read
Updated: May 9
“Did you see that?” I hit pause and rewind the episode of Succession we are watching. “It’s a term sheet!” I announce to my other half. I sense the eye roll as I provide unsolicited commentary on the splendor of this often-overlooked document in a founder’s deal-making toolbox. “You see? That’s the essence of a $2 billion transaction captured in a single page!”
If you want to save money and streamline the deal-making process, use a term sheet. I’ll often hear a startup founder celebrate the signing of a letter of intent or memorandum of understanding (I’ll collectively refer to them as “LOIs”). And while this is generally a positive step towards a contractual agreement, I often think to myself, “A term sheet would have been quicker and easier.”
What Are Term Sheets?
A term sheet is, simply put, a concise overview of the key terms of a deal. If the contract is the final structure you’re building, the terms sheet is the blueprint you create before breaking ground.
Founders are generally familiar with them in relation to investment opportunities. But, term sheets can be applied to virtually any type of business transaction and are especially useful when a deal involves complex or novel terms that lend themselves to negotiation.
The beauty of a term sheet lies in its brevity; typically condensed to a single page with two columns: the name of the term and its proposed substance, worded clearly and concisely.
Terms sheets are typically non-binding and will explicitly say so. However, depending on the nature of the deal and the parties, it is not uncommon to include some binding provisions, such as:
Confidentiality requirements
Dispute resolution procedures
Expense reimbursement terms
Exclusivity periods
Termination conditions
It is also important to note that some state courts have inferred from term sheets an obligation to negotiate in good faith. If that is not the parties' intention, they can state that in the document.
Why Founders Ought to Use Term Sheets
Using a term sheet forces clarity, reducing the likelihood of a deal falling apart, cutting the cost of contracting, and focusing the parties on what matters.
Term sheets allow negotiating parties to align their interests before starting the time and money-intensive process of drafting contracts. Creating a term sheet takes you through the exercise of distilling complex points of negotiation into digestible terms; the process helps identify significant issues and points of contention long before they become costly problems along the way.
They also make the contracting process more efficient. A term sheet serves as the guide and outline for the attorneys drafting the actual agreement, streamlining the contracting process. With the key terms agreed to upfront, counsel can prepare initial drafts that are more likely to take the form of the final agreement.
LOIs, on the other hand, risk being more of a distraction than an aid. Compared to a well-prepared term sheet, LOIs are often wordier, lengthier, and will read more like a contract, with legalese, even though it's not the parties' intention for it to be one! (Remember: if it looks like a contract, reads like a contract, feels like a like a contract, it doesn’t matter if you say its not a contract, a litigious party can argue it's a contract). All this extra verbiage serves to do is make it harder to see the forest from the trees.
How to Effectively Use Term Sheets in Startup Deals
As previously discussed, a term sheet is simply a document with two columns: the name of the term and its proposed substance. It does not need to include every term of the eventual agreement, but should instead, only focus on the key negotiable terms. When preparing a term sheet, startup founders ought to consider:
Collaborating with the other party to identify and outline the essential deal components up front.
Keeping the language clear and simple. Avoid including excessive detail and unnecessary legal jargon that better belongs to the final agreement.
Being explicit about binding versus non-binding provisions. For example, if you want the ability to walk away or you want the fact that you're discussing a deal to be confidential, state this explicitly.
Ensuring clarity and accuracy. Nothing in the term sheet should be misleading or ambiguous; You don't want to invest significant time in a deal only to have a deal-killing misunderstanding arise later.
Consulting with Legal Counsel to make sure they fully understand each term and the implications it will have on the business, helping to anticipate potential issues before they become problems.
Not every transaction requires a term sheet, but for those significant deals, instead of proposing an LOI, take hold of the complexity, create structure, and bring clarity to the negotiations by putting forward a term sheet, and see how it can save you time and money.
For more reading on term sheets and some examples in the investment arena, here are some resources:
This article is for informational purposes only and does not constitute legal advice.
For those interested, the Succession episode we were watching was series 3, episode 7, Too Much Birthday.
