Why should a term sheet be confidential?

December 13, 2007

Venture funds do not want their term sheets disclosed to other potential investors in order to avoid the deal terms being shopped. Below is a typical term sheet provision.

[Confidentiality: Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms shall not be disclosed to any third party without the consent of the Company and the lead investor(s), except as may be (i) reasonably required to consummate the transactions contemplated hereby or (ii) required by law.]

Please keep in mind that venture funds typically do not sign non-disclosure agreements. Therefore, the confidentiality provision in a term sheet is not binding until it is signed by both sides. However, I suppose that venture funds need to trust companies not to disclose unsigned term sheets in the same way that companies trust venture funds to not disclose business plans.