Doing Internet Term Sheets
by Eric Goldman, Cooley Godward LLP (firstname.lastname@example.org)
1. What is a Term Sheet?
- A brief summary of the significant business aspects of a deal
- All of the following are the same thing: term sheet, memorandum of understanding (MOU), letter of intent (LOI), heads of agreement, deal points, etc.
- Types of Term Sheets:
- nonbinding term sheet
- partially binding term sheet. Typical things to make binding: confidentiality, no press releases, standstill (rare), obligation to negotiate in good faith. If payment is made on term sheet signing, allocation of those payments should also be addressed.
- binding term sheet—THIS IS AN OXYMORON!!! THERE IS NO SUCH THING!!!
2. Why Do a Term Sheet?
- Summarize oral discussions
- Make sure the parties are properly communicating. Avoid the unpleasant experience of realizing after hours of negotiation on the final documents that the parties have not really agreed on the basic business paradigm. Example: what resides on a party’s servers.
- Identify early lurking business issues that have not been addressed
- Provide a solid framework to the drafter of the final documents
- Save time and money. Eric’s rule of thumb: clear and detailed term sheets cut negotiation time and attorney expense roughly in half.
3. Dangers of Term Sheets
- Additional cycle of negotiation. However, Eric’s theorem: “You can only move catharsis around, but you cannot reduce it.”
- Ambiguity about whether it is binding or not
- Be very clear if portions are intended to be binding. Watch out for waffling language!
- Never do “binding term sheets”—these do not exist and are NEVER replaced with a definitive document.
- Use the following language: “This term sheet is merely an expression of the parties’ current business intent. Thus, it is not binding on either party, and neither party shall have any obligations to each other regarding its subject matter except pursuant to a mutually executed agreement. Either party can terminate discussions at any time, for any reason or no reason, without liability to the other party.”
4. Advanced Topics
- Can I issue a press release on a term sheet or disclose it in a Registration Statement?
- Covering “legal” issues in the term sheet (governing law, warranties, indemnities, dollar cap)
- Getting attorney review on term sheets
About the Speaker: Eric Goldman (formerly Eric Schlachter) is an attorney practicing cyberspace law with Cooley Godward LLP, Palo Alto, CA. He also is an adjunct professor of Cyberspace Law at Santa Clara University School of Law. Cooley Godward’s web page is located at http://www.cooley.com, and Eric’s personal home page is located at http://members.theglobe.com/ericgoldman/. Eric can be reached at email@example.com.