Every partnership should begin with a carefully drafted business term sheet. Prematurely launching into agreement drafting without an outline of essential terms deprives parties of a valuable step in the partnership formation process. Consider the following tips for drafting better term sheets:
- Be clear about the purpose of the term sheet. A term sheet delineates the material expectations of the parties and creates a business framework around which a legal agreement can be prepared. While a term sheet will not be a definitive, binding agreement, it serves as an anchor for foundational deal terms. It also helps set internal expectations for each party’s business team and board. Setting internal and external expectations is critical to creating a successful partnership.
- Learn more about your partner. The process of preparing a term sheet can be as valuable to a budding partnership as the term sheet itself. At this early stage, stakeholders have a lower-stakes opportunity to feel out the other party on substantive issues, negotiation style, and temperament. For example, if one party can’t commit to anything, is prone to excessive word-smithing, or keeps kicking the can down the road on material terms, the other party should quickly get a good sense as to whether they have selected the right partner or program delivery method.
- Include only the material terms of the deal. Keep the term sheet simple, and don’t get lost in detail. Don’t let the term sheet devolve into legalese. When a complex term requires explanation, include a brief narrative explaining the intent of the parties, rather than prematurely drafting contract language.
- Make sure the term sheet is internally consistent and complete. While a term sheet should be concise, make sure terms are consistent with each other and major concepts tie together with no gaps in logic or sequence, particularly concerning schedules and costs. Add charts or tables to capture detail that is too cumbersome for narrative. (Bonus: charts and tables tend to reveal inconsistencies not apparent in traditional paragraph form.)
- No two term sheets should look the same. What constitutes a successful term sheet will be defined differently across partnerships. Some will be more detailed than others, and others may be more aspirational than definitive. Don’t let term sheet templates blind you to the material terms and needs of your partnership.
Engaging attorneys to prepare an agreement before business terms are clearly articulated often results in lost time and higher-than-expected legal fees. A well-developed term sheet not only will lay the groundwork for better agreements, but the process of preparing the term sheet will also provide a structured path to building a successful long-term partnership.
Innovate P3 works with clients to identify, prioritize, and articulate clear business and policy objectives for contracts and governing documents throughout the programming phase to streamline agreement preparation and negotiation.