Are Term Sheets Really Nonbinding?
3.30.2023
While are typically labeled as "nonbinding," most do in fact adhere legal obligations to your company. This blog post explores certain specific terms in term sheets that will create legally binding obligations.
Once upon a time, some founders needed money. They pitched a group of investors, and the investors agreed to give them many gold coins at a set valuation. The founders were happy, and the investors were happy. The company prospered, and everyone lived happily ever after.
A first summarizes the material terms of a financing transaction. are normally not legally binding (with certain exceptions, such as confidentiality and exclusivity) but they are generally thought of as morally binding.
As a first time founder, I remember running from pitch to pitch trying to close that first round of funding, dreaming of a huge valuation that would be clickbait for the press, paper over my entrepreneurial insecurities, and be my user-growth silver bullet.
Hollywood’s exclusive parties include only the hottest A-listers. Exclusive sales are advertised only to a boutique’s biggest spenders. The world has its own take on exclusivity: Investors and buyers routinely insert an “exclusivity provision” into of companies they’re looking to fund or buy.
You might know it as a or a . Maybe you’ve heard it referred to as an MOU, or memorandum of understanding. Whatever you call it, this document of about five pages is a summary of the terms of a deal the parties hope to close down the line.
You’ve just received your first venture capital . Congratulations—you’ve earned it. Now what does it all mean? “Pre-money valuation,” “ preference,” “pro-rata rights”? A seasoned venture capitalist (in this post, a VC or investor) has seen and invoked these concepts hundreds, if not thousands, of times. You? Maybe not so much.
