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July 17th, 2006:

VC Annoyance: Term Sheets Excluded from Closing Book

The Closing Book of a financing is the definitive collection of all documents relied upon in conducting a financing. It will generally have a “snapshot” of critical documents before and just after the financing, such as the original Articles of Incorporation dated one day, and the “amended and restarted” articles dated the next. Other agreements such as Investor Rights Agreements and Stock Purchase Agreements are included as well.

However, much to the chagrin of analysts like myself who often have to go back to the closing book for reference purposes, the actual term sheet often is not included in the closing book! This is most frustrating, since as a practical matter it is usually more relevant to discuss “term sheet to term sheet” when comparing terms or negotiating a subsequent round, rather than referring to definitive legal documentation (I estimate that the ratio of words and pages in a term sheet to those in the definitive docs based upon the term sheet is around 1:250).

I believe this is because attorneys are loathe to include anything in the closing book that might give even a thin entering wedge of challenging the definitive docs. Specifically, if a term sheet is included, a party might contend that the term sheet was the “parent” of the documents that followed, and should therefore inform the interpretation or construction of the definitive docs.

This may be a legitimate concern, but damn it, lawyers, couldn’t you just stamp: “non-binding, subject to the definitive documentation” in red all over the term sheet and stick it in the closing book??