Is Your Term Sheet Binding? New Delaware Case Provides an Overview

A cash-strapped AI startup executed a licensing term sheet, but when the startup failed to perform its obligations, it was sued. The startup then argued that the term sheet was non-binding. The Delaware Court of Chancery disagreed.

In Candor Compass LLC v. iDentivisuals SRL, et al., decided on September 4, 2026, the court held that the term sheet was a “valid and enforceable agreement” which the startup breached, granting specific performance to the licensee. iDentivisuals SRL (“IDV”) developed an AI tool to analyze human emotions and attempted to pair itself with serial entrepreneur David Noteware, who had experience in the legal vertical, in order to commercialize the product for use with depositions. Noteware formed Candor Compass LLC as the licensee.

Noteware negotiated for not only a license to the technology, but IDV’s intellectual property would be turned over to Candor Compass in the event of breach. Unknown to Noteware, IDV was not paying its developers, and they held the product hostage. After months of attempting to work out a solution, including paying some of IDV’s bills, Noteware opted to sue for specific performance of the term sheet.

Term sheets are often used in negotiations, whether for M&A, raising capital, or debt, for example. This case is therefore instructive when using a term sheet in any situation.

The court said:

“The Delaware Supreme Court recognize[s] two types of binding and enforceable preliminary agreements. Type I agreements are fully binding and reflect a consensus ‘on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document.’ …The parties to a Type I agreement are ‘fully bound to carry out the terms of the agreement even if the formal instrument is never executed.’”

“On the other hand, Type II agreements are “binding only to a certain degree.” They reflect a consensus “on certain major terms, but leave other terms open for future negotiation.”… a party to a Type II agreement generally “has no right to demand performance” of the ultimate contractual objective.”

“In determining which type of agreement the parties intended…the best place to start is within the four corners of the document. But the Court may also consider ‘the course and substance of negotiations’ and ‘a reneging party’s post-signing conduct.’”

The term sheet ultimately provided the terms for Candor Compass to license the intellectual property from IDV in exchange for royalties and equity. The term sheet also stated it “creates legal rights and obligations,” as opposed to an earlier draft which stated it was for discussion purposes only. IDV wanted the term sheet to be binding so that it could book revenue under its accounting regime, but when sued, it did not want to abide by the term sheet IP transfer provisions. IDV was speaking out of both sides of its mouth.

Drafters should therefore pay careful attention to falling within the Delaware guidance of Type I or Type II term sheets. Explicit language that the parties intend to be bound, regardless of whether the more formal document is executed, should be included in a Type I term sheet. And all major points should be negotiated. Explicit language that the term sheet is for discussion purposes only which do not bind the parties should be included for a Type II term sheet, and there should be major points which have not yet been negotiated. Understanding the distinction between these two types of term sheets is therefore critical before executing one.

Jerome Fogel is a founding partner of Fogel & Potamianos LLP, a firm recognized by Chambers & Partners’ California Spotlight Guide for excellence in corporate law. A partner in the Corporate Practice Group and Chair of the Sports & Entertainment Group, he is known as an innovator and dealmaker in the legal community. He serves as a general counsel to privately held companies with a specialty in mergers and acquisitions.

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