- Does it really matter and why?
Yes, it does and very much.
First thing first, a term sheet is not a contract in a sense that its contents are legally binding. To be exact, though some of its provisions are contractually bound by parties (e.g. – exclusivity, confidentiality, governing law and dispute settlement), the rest is not. A term sheet should be simply read like “Okay, we’re in. Let’s make a deal!’.
So, why does this seemingly harmless (and non-binding) document matter?
Before answering this question, I would like to share a interesting finding that not quite a few local founders frequently move between two extremes.
At an extreme, some founders, and even investors, that I met utter that what they agree in the term sheet is not a big deal. What counts should be the legally binding ‘transaction’ documents to come (e.g. – the share purchase agreement or shareholders’ agreement)? Fair enough because, ultimately, a term sheet’s contents are not carved in stone.
Nevertheless, as a matter of investment practice, a term sheet is extremely critical in a sense that future transaction documents, more or less, just mirror and detail what parties have agreed in the term sheet. Simply put, if you are not well-prepared for a term sheet, it would be extremely difficult for you to change your agreed position in rounds of negotiations to come. Of course, quitting the deal or die trying to reverse what you negligently missed may not be a bad option. But let’s think about the price of such move in light of your future calls for investment.
At another extreme, some hungry founders blindly sign whatever thrown away to them and, soon, realize how big mistake they just took. A perfect example would be the recent noisy case of the Kafe restaurant chain where founders’ constantly conflicts with investors end in Ms. Dao Chi Anh, its founder, being forced to leave the Kafe and business of the Kafe itself went south.
REMEMBER: Neither of these two extremes are good for long-term development of the startups. After all, when an investor is interested in a startup, it aims at keeping the founder on board until exit. If rotten from inside, a business would sooner or later turn fruitless. Hence, to make sure that founders fully understand what they would commit is critical for a future success. As for me, in some cases that I was engaged, I always ask the founders to find a lawyer who is familiar with deals of similar nature.
WARNING: Is a term sheet recognized and enforceable in Vietnam with respect to some binding contents? The answer would be Yes though parties may agree for it to be interpreted by foreign law and heard by foreign dispute settlement body.
In the next post, I will discuss how a term sheet is positioned in a venture deal and a typical acquisition process taking place in both offshore territory and Vietnam.