Be Careful What You Bargain For: Court of Chancery Holds Startup to “Binding” Term Sheet and Orders Transfer of Its IP

A cash-strapped startup wanted a binding term sheet it could show to investors to prove its viability. The problem? It got one. In Candor Compass LLC v. iDentivisuals SRL, C.A. No. 2024-1179-MTZ (Del. Ch. Sept. 4, 2026), the Delaware Court of Chancery held that a licensing term sheet was a fully binding preliminary agreement, not an unenforceable “agreement to agree,” and ordered the startup to hand over its intellectual property (IP) after it breached that agreement. The lesson: if you sign a term sheet that says it is binding and leaves no material terms open for further negotiation, expect to be bound.

Background

iDentivisuals is an artificial intelligence (AI) startup developing technology to recognize human emotions to assess credibility during depositions. It sought an adviser with experience and access to the legal technology space. After two months of negotiations, it executed a term sheet to license its technology to Candor Compass, a limited liability company formed by an adviser to iDentivisuals. Id. at 1, 4, 18.

The first draft of the term sheet stated that it was for “discussion purposes only,” and was “not intended to create legal rights or obligations.” Id. at 10. But iDentivisuals needed more. It owed its development team nearly $20,000 it could not pay, and the development team was threatening to cut off access to the platform they were building together. Id. at 11–12. iDentivisuals knew that a nonbinding term sheet would not be enough to convince investors it was a viable bet, and it needed to book revenue fast. The parties struck the disclaimer, and in its place, wrote that the “term sheet creates legal rights and obligations.” Id. at 13, 17. iDentivisuals then booked the negotiated $60,000 fee as revenue, and began touting the term sheet to investors as a licensing agreement. Id. at 17–18.

Per the term sheet, iDentivisuals would deliver the materials needed to run the technology independently and escrow the rest of its IP. In the event that iDentivisuals breached, the agreement stated that “all Technology and escrowed material shall be automatically conveyed in fee simple” to Candor Compass. Id. at 19–20.

iDentivisuals failed to deliver the materials needed to run the technology independently, and did not escrow its IP. It also concealed that it had stopped paying its developers, who later cut off access to the platform. Id. at 12, 16, 20–24. Candor Compass sued for breach of contract and specific performance, seeking to enforce the conveyance, and for a declaration that Candor Compass, not iDentivisuals, was the “rightful owner” of the technology. Id. at 29–30.

A Type I Agreement

In SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330, 349 (Del. 2013), the Delaware Supreme Court recognized two types of binding and enforceable preliminary agreements. Type I agreements are “preliminary . . . only in the sense that the parties desire a more elaborate formalization of the agreement,” but are otherwise “fully binding,” reflecting a consensus on “all the points that require negotiation.” Candor Compass, slip op. at 33–34 (quoting Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987), and SIGA, 67 A.3d at 349 n.82). By contrast, Type II agreements are “not fully binding” but do require parties to “negotiate th[e] open terms in good faith.” Id. at 34–35 (quoting In re Est. of Landon, 2023 WL 5533132, at *3 (Del. Ch. Aug. 28, 2023)).

iDentivisuals argued that the term sheet was a Type II agreement – merely an “agreement to agree.” Id. at 33. The court was not persuaded. Relying on the four corners of the document, the court held that the term sheet did not leave terms “open for further negotiation,” distinguishing it from the Type II provisions at issue in Cox Communications, Inc. v. T-Mobile US, Inc., 273 A.3d 752, 761 (Del. 2022), and Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, 2022 WL 1499828, at *13 (Del. Super. May 11, 2022), which left material terms, such as price, unresolved or made closing contingent on negotiating definitive documents. Candor Compass, slip op. at 35–38.

iDentivisuals’ own conduct also contradicted its argument. It agreed to delete the provision that stated the term sheet was nonbinding and its CEO testified that he “wanted . . . more than just a heads of agreement.” Id. at 39 & n.226. It bargained for an upfront fee, which it recognized as revenue after signing. Id. at 40. And it told “anyone who would listen” that the term sheet was binding. Id. In short, “[n]obody indicated that the Term Sheet was simply an agreement to agree until just before trial.” Id.

Specific Performance of the IP Transfer

Having determined that iDentivisuals breached the term sheet, the court next ordered specific performance resulting in the transfer of IP. Assessing the balance of equities, the court rejected the argument that specific performance would constitute a windfall, explaining the transfer was the agreed-upon failsafe against the exact type of risk that had materialized. Id. at 63–64. The court also rejected iDentivisuals’ proposed alternative of a continued license, finding no reason to believe iDentivisuals could now perform its end of the bargain without the court’s continued supervision. Id. at 64–66.

Key Takeaways and Reminders

Candor Compass reminds that, “[t]o say that Delaware prides itself on the contractarian nature of its law risks understatement.” Id. at 60 (quoting New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 565–66 (Del. Ch. 2023)). iDentivisuals bargained for a binding term sheet, and a binding term sheet is what it got. An eleventh-hour argument that the term sheet was merely an agreement to agree could not save iDentivisuals from that bargain.

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