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Honor the term sheet you signed
A term sheet isn't worth the paper it's written on until it is signed, and after both sides sign, Doug Leone thinks they have to honor it. He has sat on the board of a company that signed a term sheet with an investor, and three days later someone else was interested at a much higher price. For him there is no way the company switches.
The usual objection is fiduciary duty: a board owes it to shareholders to take the higher price. His reading is that the duty is to make sure the culture of the company is a clean one and that it does business the correct way. Having shaken somebody's hand matters.
He is trusting by default and has never been burned in business.
Why is a term sheet mostly non-binding?
A term sheet is a short summary, often just a few pages, of the main terms of a proposed investment. Most of its provisions state the parties' intent, while the binding terms are set in the longer definitive agreements that follow due diligence. Provisions such as confidentiality and exclusivity are generally written to be binding from signing.
What stops a company from shopping offers?
Many term sheets contain a no-shop clause, which bars the company from soliciting or negotiating with other investors for a set period. That period is commonly thirty to sixty days, giving the investor time to complete due diligence without a competing bid appearing. The clause is one of the binding provisions in an otherwise non-binding document.
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