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Term sheets can be binding or non-binding. Companies should carefully review term sheets, or letters of intent (LOIs), to determine whether they are intended to be binding or non-binding. Whether or not a term sheet as a whole (or certain provisions within a term sheet) are binding, should be made explicit in the provisions of the term sheet.

Generally, venture capital financing term sheets are not binding except for certain provisions that are explicitly identified as such. These binding provisions are typically the “exclusivity” and “confidentiality” provisions. Exclusivity provisions require the parties to a signed term sheet to negotiate only with each other for a defined period of time, and prevent a company from shopping around a signed term sheet to obtain a better or different deal from another party. Confidentiality provisions require the parties to a signed term sheet to keep private the terms and the existence of the term sheet.

Even if a term sheet is non-binding, it is important to obtain professional advice and carefully negotiate the key deal points at the term sheet stage. It is generally expected that the key deal points set forth in a term sheet will be reflected in the definitive agreements of a transaction. A company should not sign a “non-binding” term sheet for a financing and expect to negotiate or renegotiate major deal terms during the course of the transaction. Once a term sheet is signed, it becomes difficult to negotiate away from the provisions in the term sheet unless there was a material misunderstanding or lack of agreement. For example, if a company agrees in a term sheet to provide the lead investor with a seat on the company’s board of directors, it is unlikely that the company would then be able to eliminate that board seat while negotiating the definitive financing documents without an exceptional justification for the change.

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