Startup Advice: Term Sheets Are Not Legally Binding
The Wikipedia definition of a Term sheet – a bullet-point document outlining the material terms and conditions of a business agreement
It can be described as a non- binding document (like a Letter of Intent) which records two or more parties’ intentions to enter into a future agreement.
Venture Capitalists (VCs) backing out of a term sheet agreement for any reason can be very harmful to a company’s reputation.
If the VC has agreed on the conditions of a term sheet earlier, and then for some reason has backed out, then it’s not his fault. The term sheet by no means is legally binding upon any party involved in the contract.
VCs generally have valid reasons before they decide to back out from investing. Any void term sheet can be devastating for a startup company. If one VC backs out of an offer, then other ‘potential investors’ will look at a startup suspiciously and raising investment will become difficult.
Just remember – be diligent, don’t over promise and NEVER forget that a term sheet is not legally binding.
Read the following articles for a greater insight on the matter:
http://www.readwriteweb.com/start/2010/02/how-your-term-sheet-affects-yo.php
http://cdixon.org/2010/02/03/backing-out-of-a-term-sheet/
It was at Bessemer that I learned you never back out on a term sheet except in cases of fraud etc. I never saw them back out on one nor have I heard of them doing so
This is very useful advice for anyone who is about to set up a business agreement with another party. It is interesting to note that although a term sheet is not lagally binding, it can be harmful to your company to back out of a term sheet agreement.