Term Sheet vs Memorandum Of Understanding: What’s Different?

Dec 12, 2019
Reading Time: 2 minutes
Written by Cecilia Tran

Recognising what the difference between a term sheet and a memorandum of understanding is vital in enforcing a business agreement. In particular, it will become crucial in party disputes of terms and conditions of an agreement.

It is important that you understand the circumstances that these legal documents can be apply to avoid ambiguous party disputes. This article will guide you through the definitions of a Term Sheet and Memorandum of Understanding and its key differences.

What is a Term Sheet?

A Term Sheet refers to a non-legally binding agreement which sets out terms and conditions of a commercial agreement. The main objective of a Term Sheet is to formulate a document that contains bullet-point information for further confidential discussions between the parties. In other words, a Term Sheet will guide the business to invest in your start up to reach a legally binding agreement. For example, you enter into arrangements with another business for investment. The Term Sheet will detail what you can offer and what the business will receive in return. In most instances, the Term Sheet will also detail how each party is to protect the agreed investment.

This is like the ‘onboarding’ process of the business into your investment. Whilst this process sounds like an exciting venture, it is important to not overlook the details. Providing the investor with a clear and concise Term Sheet will aid in avoiding confusion and address implied terms.

What is a Memorandum of Understanding?

A Memorandum of Understanding is not legally enforceable but seeks to provide the common goals and vision that your business wishes to attain with the investor. The insertion of a statement detailing the legal responsibilities will allow you to avoid legal liability. Typically, a business will use this document when there is a low level of complexity. For example, you and your investor wish to collaborate together to achieve a common goal or vision. Further, you should use a Memorandum of Understanding when you want to:

  • Discuss the framework for your investor to negotiate terms and conditions.
  • Record terms and conditions that you and your collaborator has agreed on a particular date.
  • Set specific details of business arrangements and commitments.
  • Clarify processes on pre-contractual issues including confidentiality and intellectual property.

Subsequently, you should seek to consult a lawyer to analyse it before any legal issues can arise.

What is the Difference?

Now that you have an understanding of the definitions of each legal document and an equipped knowledge of practical application, it is now time to know the differences. While both legal documents are not enforceable, they do two distinct differences. First, a Memorandum of Understanding is generally written in the form of a memorandum. In contrast, a Term Sheet is typically written informally in bullet point form focusing terms and conditions that you and your investor intend to enter. Second, Term Sheets are generally used as a basis for producing formal documents. For instance, as a business owner, you produce a contract that consists of clauses regarding the purchase or selling of shares in your company which reflects the Term Sheet. On the other hand, a Memorandum of Understanding contains vague language such as “Party XYZ may do Z”.

Final Thoughts

In conclusion, it is clear that legal liability may be disputed in a Term Sheet and a Memorandum of Understanding. Thus, it is important that you are able to recognise and be familiar with legal documents that are similar in purpose but different in execution. If you need further assistance, the Business Government website can be of use.

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