Your term sheet doesn’t necessarily have to be confidential, but it’s not a bad idea. Read on to learn why.
Term sheets provide concise summaries of terms and conditions of your latest business agreement. Many businesses choose to keep term sheets confidential. Learning the advantages of having confidential term sheets will have you wondering if this is the right choice for your business.
What Is a Term Sheet?
Term sheets summarize a business agreement using bullet points. They summarize the overall intent of a business agreement before it gets sent off to the legal department. Your legal team then hammers out the details, coming up with the final agreement all parties will sign. Term sheets can be binding or non-binding.
Term sheets and letters of intent are similar documents, with the bulleted simplicity of a term sheet being its primary distinguishing attribute. Letters of intent also, at least in theory, refer to things a party wants done. A term sheet includes only proposals for the future.
Problems With Confidentiality
There are a couple problems with confidentiality surrounding term sheets:
- Confidentiality agreements are never binding until both sides sign them. This means you must agree to confidentiality from the get go for maximum protection.
- Making your partners sign a confidentiality agreement can put everyone on the defensive. Venture capital firms often trust companies not to reveal what is contained on a term sheet. Likewise, private companies trust a VC firm to not reveal their business plan. This mutual trust provides a great way to start doing business with one another.
Still, you might find that the benefits of an NDA far outweigh any problems you might encounter from a confidentiality agreement.
Getting a Nondisclosure Agreement
Nondisclosure agreements, also known as secrecy agreements, proprietary information agreements, confidential disclosure agreements and confidentiality agreements bind participants to not discuss terms of a document for a specific period of time -- or indefinitely.
When you want an NDA for your term sheet, you will want a mutual NDA. This is a bilateral NDA that binds both parties. While you might ask for a unilateral NDA, binding only for your partner, this could easily create an environment of toxic distrust, killing the potential deal.
Have your legal team work on any NDA in conjunction with your partners. This ensures that all parties are satisfied with the specific terms agreed upon.
Term Sheets and Confidentiality
In most cases, NDAs aren’t required for a term sheet. Indeed, if you feel the need to get one you might ask yourself why you are doing business with a partner you don’t feel you can trust. Still, if done right and with the input of all parties, an NDA can ensure both parties rest easy at night when thinking about their term sheet.