Is a Term Sheet Binding?

By Seed Rounds, Venture Capital

A term sheet is an outline of the deal terms that helps frame the contemplated transaction for both parties. Term Sheets for financings and acquisitions are usually not binding. However, it is quite common to see various sections of the term sheet binding, including:

No Shop or Go Shop Clauses: Can a party shop the deal to 3rd parties or is it prohibited?
-Expenses: Determine which party pays for (legal) expenses and which party’s counsel drafts the transaction documents.
-Confidentilaity: Keep the existence of the term sheet and contents confidential.

If a term sheet is not binding, then why draft one?

It’s a good starting point to help all parties involved define the deal, in addition to providing some safeguards if the contemplated transaction falls through during negotiation. Finally, if you can’t agree to a term sheet, it’s probably not worth proceeding with due diligence investigations along with drafting the transaction documents.


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