Tales From The Trenches: Negotiating M&A Term Sheets In The Pandemic

Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.

Louis Lehot
8 min readJul 21, 2020

The global pandemic, sheltering in place, the shutdown of the economy and the stalling recovery has triggered a massive drop in M&A activity, with the total value of deals in the first half of 2020 at just over $900B, 53% below the same period in 2019, and the lowest half-yearly total since the first half of 2010. Volume, meanwhile, fell 32% year on year, to just under 7000 deals, the lowest half-yearly volume total since the first half of 2013. Meanwhile, according to the CB Insights quarterly report on venture capital, on a quarter over quarter basis, M&A activity also suffered a sharp decline, falling to 120 exits in Q2 of 2020 from 155 in Q1 2020.

While much has been written on the key issues in M&A deals that have been brought on by the global pandemic, Silicon Valley lawyer Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C., hosted a webinar on Tuesday, July 14, 2020, to focus in on how to negotiate an M&A term sheet. The webinar, moderated by Lehot, featured panelists Natasha Allen, founding partner of Allen & Hatcher LLP, Vitaly Golomb, managing director of GS Capital, and Brian McAllister, principal at MBL Counsel.

Following the webinar, we sat down with Louis Lehot, who has helped dozens of entrepreneurs in technology and life science businesses navigate to successful exits, as well as big tech, real estate and life science strategic and financial buyers construct smart acquisition strategies. As with the webinar, we focused on key takeaways on how to approach the M&A term sheet, particularly in this environment.

Term sheet — pros and cons

Louis Lehot
Picture Credits: Pexels.com

In any M&A process, there comes a time when buyer and seller need to come to a meeting of the minds on the key terms of a deal. The benefits of a term sheet, while typically non-binding, clarify for the lawyers and advisors what has been agreed in principle. Term sheets offer a vehicle to outline the timetable to complete key tasks and who has what responsibilities to get to signing and closing. Typically, buyers will exchange this confirmation of key terms in exchange for exclusivity of negotiations for some period of time. Panelists noted many of the key benefits from a process point of view, and the ability to identify deal-breakers at the outset, and to focus negotiations. A term sheet can often enhance deal stability and commitment of all parties. Louis Lehot warned sellers negotiating term sheets with exclusivity to get the key terms written down before signing the exclusivity provision, as the leverage in negotiating power shifts to the buyer as soon as the ink dries.

While there can be disadvantages in terms of cost and time to negotiating the term sheet before the definitive documents, panelists underscored how typically the benefits outweigh the costs. Unintentionally binding obligations or duties to negotiate in good faith should be explicitly disclaimed.

Binding or non-binding

Most M&A term sheets for venture capital-backed companies contain an exclusivity provision for some period of time that bars the sellers from exchanging information or maintaining discussions with any third parties. This provision, together with confidentiality, is typically the only binding provision. Care should be taken to specify that every other provision is non-binding, and to disclaim the duty to negotiate in good faith or claim partial performance requirements. Some remedies can include break fees.


The content of term sheets can include the buyer, the seller, and key stakeholders who buyer wants to support the transaction. It is helpful to specify the structure, whether it is an asset purchase, share purchase, merger or other creative way of exchanging value (e.g., license). The calculation of the purchase price, as well as any underlying assumptions, minus any holdbacks or escrows, plus any contingent pieces of consideration and adjustments for extra cash, debt or working capital should also be spelled out. Some term sheets will spell out key representations, warranties, covenants and indemnities that sellers will be asked to make. These are areas that seller may prefer to defer to the definitive agreement.

Increasingly, buyers and sellers are contracting for transactional insurance to externalize the risk of breach to a third party, and new products have come to market to allow parties to accomplish this in the lower middle market as well as the upper echelons of M&A deals.

Purchase price

While cash is always king, in times where valuation is challenged, parties often look to stock and other forms of non-cash consideration that have upside for sellers. Challenges can arise in how to value non-cash consideration, and when, and by whom. Smart buyers will spell out the assumptions upon which they arrived at the purchase price, allowing them to take down the value if those assumptions did not prove out in due diligence. To make sure buyers are getting what they bargain for, they are increasingly using a fleet of highly specialized advisors, from forensic accountants to produce quality of earnings reports on sellers, to engineers to conduct code scans and other consultants to test privacy and cyber-protection, to name a few.

The term sheet is a great time to spell out the amount of holdback or escrow that will be required, whether the amount payable at closing or later will be adjusted for cash, debt and working capital, and who gets to allocate basis in assets and when.

Deal structures

Panelists surveyed the various forms of structures that are typically used for parties to exchange value in M&A transactions. In the pandemic, parties noted buyers’ desire to do very targeted asset acquisitions, acqui-hires and creative structures that leave liabilities behind. Unless the target is a pass through entity for tax purposes, this can be punitive for sellers, who will pay tax at the corporate level and then upon subsequent distribution to the shareholders. In distressed M&A, sellers often have little alternative to accepting whatever terms are on the table.


Panelists discussed the use of earn-outs in technology and life sciences transactions, and how they differ across industry verticals. In the pandemic, buyers are asking sellers to take risk on purchase price and bridge gaps in valuation expectations with contingent pricing mechanisms. While some say that no earn-out goes unpaid, some panelists referenced that smart buyers will adjust the terms of the earn-out to continue to incentivize target employees to deliver a successful business, even if business conditions change. Disputes are best handled by experts in non-judicial proceedings with clearly defined processes that get resolved quickly.

Special issues

In the pandemic, special issues can arise where the liquidation stack for the preferred stockholders exceeds the enterprise value of the company at sale, potentially leaving management and the common holders high and dry. As board directors have fiduciary duties to all holders, and because stakeholders need management’s help to execute on a transaction, management carve-out plans and common stock reserves can be set aside to share the proceeds equitably.

Buyers will look to maintain maximum incentive for target employees, and will purchase back on acceleration of vesting and look for management to “roll over” a portion of their equity.

Break fees and reverse break fees help give some certainty to buyers and sellers in the event of broken deals.

The pendulum has certainly swung towards buyers, but sellers that continue to show that they can generate $40M in revenue at 40% margins with 40% growth continue to command strong valuations and seller-friendly terms.

Tips and tricks

Panelists shared tips and tricks to create optimum outcomes in M&A transactions in the term sheet stage. State the principle and defer the details can help unstick entrenched positions. Specialists can be helpful in externalizing risk and solving disputes. Key closing conditions should be spelled out to avoid surprises. Responsibilities should be allocated clearly. Sample calculations can help avoid misunderstandings. Public disclosure should be considered always.

Summing it up

As we proceed into the second half of 2020 and the “new normal,” of remote deals, anticipating issues before they arise can best be done with the help of experts. The process of buying and selling companies can sometimes appear like a four-ring circus, said Louis Lehot. Having experienced experts and advisors who have done deals in your industry, at your approximate price point, and with similar perspectives, can help you get your deal done on optimum terms and speed. While smart people have attempted to streamline the M&A term sheet process with an open-sourced form, there remains a wide range of outcomes for buyers and sellers in M&A deals, with the pendulum swinging towards the buyers in the pandemic.

Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital, M&A and Transactions Practices and the Technology, Health Care, and Energy Industry Teams. Louis focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and to successfully obtain optimal liquidity events. Louis was the founder of a Silicon Valley boutique law firm called L2 Counsel. He previously served as both the co-managing partner and co-chair of the emerging growth and venture capital practice of a global law firm in Silicon Valley.

Natasha Allen, Louis Lehot

Natasha Allen is a trusted legal advisor with experience advising on M&A transactions, general corporate matters, tax planning strategies (including tax structuring), and due diligence in both top tier law firms and Big Four professional services firms.

Vitaly Golomb, Louis Lehot

Vitaly Golomb is managing director of GS Capital, a technology focused and FINRA-licensed broker-dealer. Vitaly is also one of the most dynamic and in-demand speakers and trainers in the world of startups, venture capital, and corporate innovation.

Brian McAllister, Louis Lehot

Brian McAllister is principal at MBL Counsel. Prior to MBL, Brian was Deputy General Counsel and Assistant Secretary of the corporate legal group at CBRE Group. Brian had global responsibility for mergers & acquisitions, debt and equity transactions, SEC reporting and compliance, corporate governance, strategic procurement, trademarks, licensing and general corporate matters.



Louis Lehot

Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley office. Follow on Twitter @lehotlouis