Use a Lawyer for Drafting Term Sheets

A lot of people want to save a buck during contract negotiations. These folks usually do not not use a lawyer for drafting term sheets or other initial matters. Sometimes, this can work out well. For bigger or more complicated deals, or for deals with a difficult opponent, this can be a bad idea. Let’s look at why.

What is the point of a term sheet?

A term sheet (also referred to as a letter of intent or LOI) is an outline of key deal points that the parties sign before negotiating a final contract. You won’t see them in all deals. They are used frequently in bigger, more complex deals like M&A or finance transactions. They can be binding but this is usually a very bad idea for reasons as I explained in the post linked above. Even a non-binding document is important though, as the parties will have a roadmap for the deal and will have hammered out key points before undertaking the expense of diligence and drafting.

Why do people try to draft term sheets without a lawyer?

Money is the #1 answer. Lawyers don’t work for free, and many folks think “what’s the point of paying my lawyer to draft a non-binding term sheet?” (I will answer this in the next subpart.) Another common concern is strategy. Getting the wrong lawyer involved could just lead to endless negotiations of a term sheer which could hurt a deal. The purpose of term sheets is to get something on paper quickly and not go back and forth 20 times. Good lawyers can avoid this issue, but we’ve seen plenty of cases where this isn’t the case.

Why people should use a lawyer to draft a term sheet

A good lawyer who has done a certain kind of deal many times will be able to spot many legal (and even non-legal) issues that many clients might miss. They may also be able to help the client clarify how things are written and defined. This can all save a TON of time and money in the long run. By flagging issues early on, a lawyer’s client can take those issues to the other side early on and see whether they are agreeable. Our corporate lawyers have seen deals fall apart over disagreements about what was in a term sheet. Another point that can be a huge time suck in a deal is where one party wants to add a key term that wasn’t in the term sheet. The other side may refuse to add it on the grounds that it was not in the term sheet. This too is another place where deals can easily fall apart. Even where a deal won’t fall apart, if the parties disagree about what a term sheet says, costs will skyrocket.

Getting a lawyer involved in the term sheet process can be key. This is especially true on complicated or expensive deals, or where one party knows it has less leverage in a deal to request changes at a later date. It’s even more true where the other side or their lawyers are going to be tough negotiators. Stay tuned to the Canna Law Blog for more corporate cannabis law updates.

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