Particularly for complex and important transactions in a company’s life-cycle – mergers and acquisitions, institutional funding rounds, joint ventures, etc. – it’s typical that the transaction process start with the preparation of a non-binding (usually) term sheet or letter of intent. These documents are no more than a few pages long and are more informally drafted than definitive agreements. The purpose is to set forth just the big picture terms of the deal. For example, a term sheet for an investment round would list the amount being raised, type of security, price per share/unit and various terms of the security (e.g., dividends, management rights, transfer restrictions). But it would not get into, for example, detailing the company representations about its business that will eventually be contained in the definitive purchase agreement.
There are some attorneys who think that the term sheet/LOI is a wasted step and that the parties should proceed immediately to drafting definitive documentation if they are interested, but I think it’s useful for everyone involved to get the most important substantive terms out on paper and make sure the parties have a meeting of the minds about them before getting lost in the weeds of negotiating the provisions of definitive agreements. This is not to say that those provisions aren’t important, but the more open issues there are at a particular time, the more likely it is that the parties will get sidetracked and lose sight of the important parts of the deal.
I mentioned earlier that most term sheets and LOIs are non-binding. Even so, there are typically provisions within the document that are expressly binding, just not the core business terms of the deal that are subject to further negotiation. Terms that are typically binding include confidentiality, governing law and (if applicable) exclusivity provisions. There are some cases, however, where the whole term sheet or LOI is stated to be binding, often when the parties want to start business activities right away, though there are still provisions detailing how the parties will go on to draft and negotiate definitive agreements.