Should You Sign Your Term Sheets? The Power of Commitment and Consistency
I recommend using term sheets for most deals other than the simplest ones. Clients often ask me, “Should we sign the term sheet?”
Previously, I told them it really doesn’t matter. From a legal viewpoint, if the term sheet states that it is not a legally binding contract, then it isn’t a contract, and signatures are irrelevant. I said, “Although it doesn’t matter legally, sign it if the parties want to show their commitment to the deal.” I would add, “It also can be useful if the company requires internal approvals for deals. Signing a term sheet can help you get the approvals and show that you got them.”
My recommendation today is stronger: if you want to commit the parties to a deal “even if the commitment is not legally binding” then sign the term sheet. The reason is not legal, and not to memorialize internal approvals.
The reason is to trigger the psychological drives of commitment and consistency.
In his book, Influence: The Psychology of Persuasion, social psychologist Robert B. Cialdini explains how people can be persuaded to move to higher levels of commitment to an action or issue. They do this out of a desire to be consistent with what they have already done. According to Cialdini, the tactic is to start with a small request in order to gain eventual compliance with related larger requests.
One tactic is the foot-in-the-door technique. Psychologists Jonathan Freedman and Scott Fraser tested and demonstrated its effectiveness. A researcher went door to door making an outrageous request of homeowners to place a public service billboard on their front lawns. “They were shown a photograph depicting an attractive house, the view of which was almost completely obscured by a very large, poorly lettered sign reading DRIVE CAREFULLY.” Understandably, 83% refused the request for the giant sign.
However, 76% of a particular group agreed to the request. Two weeks before, this group had first agreed to a small request: to display a three-inch-square sign reading BE A SAFE DRIVER. Cialdini explains that they agreed to the large request to maintain consistency with their prior agreement to the small request.
For another sample group, a researcher asked homeowners merely to sign a petition for “keeping California beautiful.” Approximately 50% of that group later agreed to display the giant DRIVE CAREFULLY sign.
Cialdini observes that “What [these] findings tell us, then, is to be very careful about agreeing to trivial requests …. I am rarely willing to sign a petition anymore, even for a position I support.” He goes on to discuss the “committing power of written statements,” such as written goals and objectives. See the book for an explanation of why the drives for commitment and consistency may work, and descriptions of circumstances where they may be particularly strong.
By the thinking of Cialdini, and the research of Freedman, Fraser and others mentioned in the book, the term sheet can become the small commitment that grows into the larger commitment of a definitive contract. Signing the term sheet helps trigger the drives of commitment and consistency.
That is well and good if you are the person pushing for a definitive deal on your terms. If you aren’t, how do you defend against this strategy? First, Cialdini recommends calling out the person who is using the strategy: “I don’t try to deny the importance of consistency; I just point out the absurdity of foolish consistency.” I would add that consistency itself can be molded: lawyers can “interpret” or “construe” wording in a term sheet or contract in order to pay lip service to consistency.
Second, obtain a review by persons who do not feel the tug of commitment and consistency. In large companies, seeking approvals by persons “up the ladder” or by functional groups (such as a finance, legal or procurement department) means that persons who are not psychologically committed will review the deal. Startups rely on their board members, investors and outside lawyers for this. (This approach uses the forces of “authority” and “social proof” that Cialdini describes elsewhere in his book.)
Third, if the term sheet is not legally binding, remind yourself as much as needed that it is not a contract. “The deal isn’t done until both parties sign the definitive written agreement.” This undercuts the force of the original commitment.
Finally, be wary of people “even on your own team” who mischaracterize your deal. Many will call a vague handshake a “done deal” when it has barely begun. Others do this to ram through internal approvals. This risks losing flexibility and necessary changes to the deal. On the other hand, many organizations lack momentum and a drive to close transactions, and too much review can slowly kill a transaction. Strike a balance. Smoke out the true blocking issues, resolve them and sign the definitive agreement, or move on.
Term sheets are excellent tools to define your deals. Keeping in mind the powerful drives for commitment and consistency, sign them with care.